Debt Investor Presentation November 2009 November 2009 Agenda - - PowerPoint PPT Presentation

Debt Investor Presentation

November 2009 November 2009

Agenda

Fi tR d d G T

• FirstRand and Group Treasury
• Funding & Liquidity Risk Management

Funding & Liquidity Risk Management

• Capital Management

p g

2

Agenda

Fi tR d d G T

• FirstRand and Group Treasury
• Funding & Liquidity Risk Management

Funding & Liquidity Risk Management

• Capital Management

p g

3

FirstRand’s Balance Sheet Management

• Pillars of Balance Sheet Management
• Capital Management

Capital Management

• Capital planning
• Capital allocations
• Economic capital process

p p

• Credit Portfolio Management
• Manage the credit portfolio from a

macro economic perspective

• Influences credit origination strategy
• Macro Portfolio Management
• Manage banking book interest rate risk

D i d i l t h d t t t

• Devise and implement hedges to protect

the groups balance sheet and earnings

• Group Treasury
• Funding & liquidity management

Funding & liquidity management

• Manage the liquidity risk of the group
• Devise and implement group’s funding

strategy

4

• Multicurrency funds transfer pricing

Group Treasury

Group Treasury

Set Strategy, Risk Appetite & Framework

Group Treasury

Centralised Treasury Functions

Group Treasury Desk

Funding & Liquidity Management Exchange Control

Finance Treasury ALM Strategic Relationship African Subsidiaries International Branches

Alternative Funding Strategies Multi Currency Funds Transfer Pricing

y Relationship Management

Integrated Approach to Funding

5

Agenda

Fi tR d d G T

• FirstRand and Group Treasury
• Funding & Liquidity Risk Management

Funding & Liquidity Risk Management

• Funding and liquidity management philosophy
• Macro economic influence on funding
• External influence on funding
• FirstRand’s response
• Capital Management

6

Funding and liquidity management philosophy management philosophy

7

Funding and liquidity management

Li idit i k i th i k th t th b k ill t b bl t t ll t

• Liquidity risk is the risk that the bank will not be able to meet all payment
• bligations as liabilities fall due. In addition not able to realise assets when

required to meet obligations (normally a consequential risk)

• Funding liquidity risk – risk that the bank is unable to fund obligations when

falling due, or meet collateral requirements, without impacting the normal course

• f business its financial position or its reputation
• f business, its financial position or its reputation
• Market liquidity risk – risk that the bank may be unable to meet its obligations

due to market disruption or a lack of market liquidity

• Context
• FirstRand Limited Board principles and limits
• South African banking and exchange control system
• South African banking and exchange control system
• This is managed as part of Group Treasury

8

Banks are in the business of maturity transformation transformation

C F ti f B k i E C t f Li idit Ri k

• Maturity transformation is the defining
• There are costs incurred for running

Core Function of Banks in an Economy Cost of Liquidity Risk aspect of banking

• Short term funded
• Long term lender

liquidity risk

• Statutory
• Cash reserves on deposit with the

SARB

• The resultant liquidity risk has to be

managed

SARB

• Carry cost of statutory liquid assets
• Cost of term funding in order to meet

statutory minimum liquidity gap

• In the context of
• Statutory liquidity requirements
• Risk appetite

y q y g p

• Board prudential limits
• SA Inc’s structural supply of money
• Risk appetite
• Cost
• Competitiveness

pp

• Cost of term funding in order to meet

liquidity gap targets set by the Group

9

Liquidity risk management philosophy

• Continuous funding and liquidity cycle
• Integrated across

Funds Transfer Pricing Target Risk Profile

Integrated across

• All financial risk disciplines
• Macro economic environment
• All business units

All business units

• Financial markets
• Forward looking
• Ensure compliance with

Risk Framework Funding Profile

Ensure compliance with

• Internal risk appetite
• Regulatory requirements

Stress Testing Liquidity Buffer Testing Buffer

10

Macroeconomic influences on funding

11

Growing balance sheets in excess of income income

Total Private Credit to GDP

200%

United States

150%

Switzerland Spain

100%

S h Af i Germany

50%

South Africa United Kingdom

De-leveraging has begun Credit growth in excess of GDP 0% c-60 c-65 c-70 c-75 c-80 c-85 c-90 c-95 c-00 c-05 c-10 Growth

12

De De De De De De De De De De De

Source: World Bank 2007, Extended SA & US , Bloomberg , June-2009

Credit extension supported M3

30% 30% 100%

Credit extension & bank assets Money supply & credit extension

20% 25% 20% 25% 80% 90% 10% 15% 10% 15% 70% 80% 0% 5% 0% 5% 50% 60% Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 M3 Y/Y House Hold Credit Extension Y/Y Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 PCE/(Banking System Assets) Total Private Sector Credit Y/Y

• Private sector credit extension (PCE) as a percentage of SA banking system assets is relatively stable at

80%.

13

• In the context of the volatile PCE y/y growth this suggests that banks are the primary funders of PCE.

Source: iNet Data Service

Banks monetised foreign liquidity

• 10

250 600

Current account deficit & PCE Foreign investment & PCE

50 10

• 200

500 100

• 20
• 10

150 300 400 150

• 40
• 30

100 200 200

• 50

50 100 250

• 60

Mar-90 Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Current Account Total Private Credit Extension (RHS)

• 100

Mar-90 Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 14 Current Account Total Private Credit Extension (RHS) Cumulative FDI & Portfolio Investment Total Private Credit Extension (RHS) Source: iNet Data Service

Increased reliance on professional funding funding

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

15 Source: SARB BA Returns

Funding pressures – demand for credit

Total Private Credit to GDP ratio Nominal GDP vs government revenue y/y

30 1 8

Index, 1970 =1

20 25 1.6 1.8 5 10 15 1.4

Trend

• 5

5 1.2

Credit/Nom GDP

• 15
• 10

93 95 97 99 01 03 05 07 1 Dec-9 Nov-9 Nov-9 Nov-9 Nov-0 Nov-0 Nov-0 Nov-0

Nominal GDP growth Government revenue growth

0.8 70 75 80 85 90 95 00 05 10

16 Source: iNet Data Service

Funding pressures – government

Government debt/GDP ratio SOEs borrowing requirement

%

140 160 180 50 55 100 120 140 35 40 45 40 60 80 25 30 35 20 40 2009 2010 2011 2012 2013 20 25 ar‐80 ar‐82 ar‐84 ar‐86 ar‐88 ar‐90 ar‐92 ar‐94 ar‐96 ar‐98 ar‐00 ar‐02 ar‐04 ar‐06 ar‐08 ar‐10 ar‐12 2009 2010 2011 2012 2013 OTHER SANRAL TRANSNET ESKOM Ma Ma Ma Ma Ma Ma Ma Ma Ma Ma Ma Ma Ma Ma Ma Ma Ma Government debt/GDP National Treasury forecast

17 Source: iNet Data Service & National Treasury

The funding market

Rb Securitisations SOEs

Array of issuers SOEs dominate term issuance

Standard Bank Basil Read Omnia FirstRand COJ Unitrans

32 36 Rbn Securitisations SOEs Municipal Corporates Banks / Financials

SOEs have entered the capital market in a big

24

Rbn FirstRand COJ Unitrans ABSA Bidvest Denel Gold Fields Netcare Unilever ACSA Toyota FS Transnet Mercedes-Benz AngloAmerican

24 28

Increased competition for funding in short term space from corporates with CP programmes p g way especially in the long term space

20 16 20 12 16 8 12 4 8 4 Q06 Q07 Q07 Q07 Q07 Q08 Q08 Q08 Q08 Q09 Q09 Q09 Q09 4

2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 18

4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Source: RMB FICC Research, 30 September 2009

The private sector

2 5% 20%

Household savings Private sector investment

2.0% 2.5% 15% 1.0% 1.5% 5% 10% 0.0% 0.5% 98 99 00 01 02 03 04 05 06 07 08 09 0% 5% 8 9 1 2 3 4 5 6 7 8 9

• 1.0%
• 0.5%

Mar-9 Mar-9 Mar-0 Mar-0 Mar-0 Mar-0 Mar-0 Mar-0 Mar-0 Mar-0 Mar-0 Mar-0

• 5%

Mar-9 Mar-9 Mar-0 Mar-0 Mar-02 Mar-0 Mar-04 Mar-0 Mar-06 Mar-0 Mar-0 Mar-0

• 2.0%
• 1.5%
• 15%
• 10%

Household Savings/Disposable Income Real Private Sector Investment y/y 19

2.0%

Source: iNet Data Service

Funding base

32% 35% 500 25% 25% 30% 400 450 13% 16% 20% 25% 300 350 13% 10% 15% 200 250 0% 0% 5% 100 150

• 5%

0% 50 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-09 20 Source: 31-Aug- 2009 SARB BA Returns Prof Corporate Retail Gov & PSE's Other Annualised Growth (RHS)

Long term SA banks 1-year funding spread

120

SA Banks 1‐Year Funding Spreads

• Consider the 1-year NCD

vs swap as a principal component in explaining

100 110 120

component in explaining the funding curve.

• 1 year funding spreads,

i th 20 30

70 80 90

were in the range 20-30 bps for 3 years from 2004 to 2007

50 60 20 30 40 10

Jan-03 May-04 Sep-05 Feb-07 Jun-08 Nov-09 21

15 Day MA Funding Spreads 1y 125 Day MA

Source: iNet Date Service

Comparing SA to US banks 1-year spreads

250 1-Yr US v SA Bank Spreads

• Comparing the US to SA 1-

year bank funding spreads.

200

spreads.

• US spreads widened more

severely than in SA.

150

Swaps

• US spreads have also

narrowed more aggressively.

50 100

Spread to S

aggressively.

• This highlights a

divergence in funding

50

pressure.

• The US Fed is providing

excessive liquidity in the

‐50

Sep‐2002 Sep‐2003 Aug‐2004 Aug‐2005 Aug‐2006 Aug‐2007 Aug‐2008 Aug‐2009

excessive liquidity in the short end, while in SA National Treasury is in fact competing for the liquidity.

22

US Banks AA 1‐Yr Spread MA SA 1‐Yr Spread MA

Source: Moody’s Investor Research & iNet Data Service

External influences External influences

23

External influences on strategy

• Macro economy, SA Inc and financial markets
• Regulatory
• Regulatory
• Basel II focused largely on credit risk
• Focused the attention of banks and regulators mostly on credit risk

Bank fail res ha e pro ed to be as a res lt of liq idit risk

• Bank failures have proved to be as a result of liquidity risk
• No sensible amount of capital can protect a bank from a liquidity event

Bank for International Settlement (BIS)

• Bank for International Settlement (BIS)
• Principles for Sound Liquidity Risk Management and Supervision, August 2008
• Financial Services Authority (FSA)

PS 09/16 Strengthening Liq idit Standards October 2009

• PS 09/16: Strengthening Liquidity Standards, October 2009
• IMF
• Report on SA Banking System, September 2009

South African Reserve Bank

• South African Reserve Bank
• Rating agencies
• Exchange control prudential requirements

24

FirstRand’s Response FirstRand s Response

25

SA banking liquidity gap

1,712 5% 10% 2,000 Contractual Maturity of Assets

Business as usual gap Contractual maturity gap

1,792 4% 6% 2,000 BAU Maturity of Assets 4%

• 5%

0% 5% 1,000 1,500 Contractual Maturity of Assets Contractual Maturity of Liabilities Contractual Cumulative Gap 0% 5% 0% 2% 4% 1,000 1,500 BAU Maturity of Assets BAU Maturity of Liabilities BAU Cumulative Gap 468 68 184 86 85 154 211 126 117 20%

• 20%
• 15%
• 10%

500 213 53 175 90 96 195 300 0%

• 1%
• 3%
• 4%
• 6%
• 4%
• 2%

500 1 063

• 126
• 377
• 158
• 117
• 178
• 334
• 486
• 20%
• 21%
• 28%
• 30%
• 31%
• 32%
• 35%
• 30%
• 25%
• 1,000
• 500
• 203
• 78
• 204
• 147
• 131
• 272
• 441
• 4%
• 7%
• 10%
• 8%

6%

• 1 000
• 500
• 1,063
• 36%
• 40%

35%

• 1,500
• 1,300
• 12%
• 14%
• 12%
• 1,500

1,000

• Liquidity risk is largely managed on a business as

usual (BAU) basis

• However under stressed conditions the BAU
• The contractual maturity profile is also managed

within the context of the structure of the SA economy

26 Source: SARB BA Returns

• However under stressed conditions the BAU

conditions no longer apply. economy

Matching funding to liquidity of assets

90% 100%

Other, 53 Cash, 14 Collateral Trading, 23 Equity, 34 Collateral Trading, 33 Term Debt,17 Other, 9

60% 70% 80%

Trading Assets, 88 Trading Liabilities, 59

40% 50% 60% 20% 30% 40%

Loans, 374 Deposits, 409

0% 10% E i d Li bili i 27 Assets Equity and Liabilities Source: SARB BA 100 Return & FirstRand Limited Annual Report

Portfolio of funding instruments

NCD's 7.7% Repo's 6 0% Securitisation 5.3% Other Trading Liabilities Derivative 7.9% 6.0% 3% Senior Debt 2.0% Sub Debt Other Deposits 9.2% Sub Debt 1.5% Conduits 0.7% Savings Deposits Call Deposits 13.1% Savings Deposits 0.4% Fixed & Notice Deposits 25.3% Current Account 18.2%

28 Source: SARB BA 100 Return & FirstRand Limited Annual Report

Funding initiatives

Domestic International

• Retail product development
• Structured Notes

I tit ti l f di International platforms

• London branch

Middl E t

• Institutional funding
• How can we help you?
• Middle East presence
• Africa (7 countries ex SA)
• Australia
• Indian branch

Products

• Listed programmes in international

markets

• Wholesale deposits
• Structured notes

29

Agenda

Fi tR d d G T

• FirstRand and Group Treasury
• Funding & Liquidity Risk Management

Funding & Liquidity Risk Management

• Capital Management

p g

30

Capital strategy in line with Basel II d l t developments

Tier 1 quality

• Tier 1 quality
• Economic capital backed by Tier 1
• Gearing
• Leverage ratios are monitored
• Pro-cyclicality
• Capital targets defined as bands to ensure we have buffers to take into

Capital targets defined as bands to ensure we have buffers to take into account the effects of Basel II pro-cyclicality and IFRS

St t ti

• Stress testing
• Capital strategy subject to stress testing

31

FRB capital position remains robust

Capital adequacy (%) Tier 1% Total % Capital adequacy ratio 10.70 13.11

12.28 13.11

2.41 2.83 Regulatory minimum 7.00 9.50 1.08 1.04 83 Target 9.50 11.50 – 13.00 9.62 8.41 Jun '09 Jun '08

Tier II Tier 1 pref shares Core Tier 1

Tier 2% Utilisation 2.41 Target 2.00 – 3.50

32

Maturity profile based on call dates

3,500

FRB05 FRBC21 FRBC220

• Call on Subordinated debt (August 2010) already considered in
• Call on Subordinated debt (August 2010) already considered in

2,500 3,000

• Call on Subordinated debt (August 2010) already considered in

detailed 3-year forecasts.

• Will continue to review level of issuance in line with stated targets
• Marked growth in RWA may necessitate further T2 issuance
• Call on Subordinated debt (August 2010) already considered in

detailed 3-year forecasts.

• Will continue to review level of issuance in line with stated targets
• Marked growth in RWA may necessitate further T2 issuance

1,500 2,000

FRB06 FRB07 FRB03

1,000

FRB01 FRB02

500

2010 2012 2014 2016 2017 2018

FRB08 FRB09

33

FirstRand Bank Limited external ratings

Moody’s Investor Standard Fitch Firstrand Bank Limited Service Foreign currency counterparty credit rating Long term A3 Sh t t P 2 Firstrand Bank Limited Standard & Poor’s Foreign currency counterparty credit rating Long term BBB+ Sh t t A 2 Firstrand Bank Limited Fitch Ratings Foreign Currency Long term issuer default rating BBB+ Short term issuer default rating F2 Outlook Negative Short term P-2 Outlook Stable Local currency counterparty credit rating Long term A2 Short term A-2 Outlook Negative Local currency counterparty credit rating Local currency Long term issuer default rating BBB+ Outlook Negative National Long term A2 Short term P-1 Outlook Stable National scale bank deposit ratings credit rating Long term BBB+ Short term A-2 Outlook Negative National Long term rating AA(zaf) Short term rating F1+(zaf) Outlook Negative Individual rating C Long term issuer default rating Aa1.za Aa2.za Short term issuer default rating P-1.za Outlook Stable B k Fi i l St th Individual rating C Support rating 2 Support rating floor BBB- Bank Financial Strength Rating C- Outlook Stable 34

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Debt Investor Presentation