[PPT] - FirstRands investment case: strength and quality of franchise will PowerPoint Presentation

SLIDE 1

FirstRand’s investment case: strength and quality of franchise will drive sustainable growth and returns drive sustainable growth and returns

Johan Burger (COO & CFO) g

SLIDE 2

Agenda

2

Headwinds

Headwinds
Macro – “new normal”
Regulation – capital and liquidity

Regulation capital and liquidity

FirstRand investment case
What is required to outperform, given headwinds

SLIDE 3

Agenda

3

Headwinds

Headwinds
Macro – “new normal”
Regulation – capital and liquidity

Regulation capital and liquidity

FirstRand investment case
What is required to outperform, given headwinds

SLIDE 4

Cumulative build-up of leverage

4

30%

“Golden” years “New normal”

20% 25% 15% 5% 10% 0% Nominal GDP growth y/y Private credit growth y/y

5%

Source: I-Net Bridge

Long on credit, short on wealth

SLIDE 5

Growth in bank earnings outpaced nominal GDP growth

5

GDP growth

Bank earnings to nominal GDP (Jan 1990 = 1.0) 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 0 5 1.0 0 5 1.0 0.5 0.5 90 92 94 96 98 00 02 04 06 08 10 12

Source: I-Net Bridge

SLIDE 6

Characteristics of “new normal” environment

6

Sluggish GDP growth
Rising inflation

Ri i l t

Rising unemployment
Flat or declining property values
Disposable income under pressure
Low levels of business confidence and activity
Interest rates to remain low

L th d l tilit Lower growth and more volatility

SLIDE 7

Macros impact banks

7

Asset growth
Expected to lag nominal GDP growth

Expected to lag nominal GDP growth

Retail expected to outpace corporate
Margins

Margins

Risk of rate cuts could reduce endowment margin
Increased cost of liquidity

q y

Bad debts
Further benefit of monetary policy intervention limited

Further benefit of monetary policy intervention limited

But asset quality much improved
Post write-off recoveries
Transactional revenues
Market share gains required to exceed nominal GDP

g q

SLIDE 8

Agenda

8

Headwinds

Headwinds
Macro – “new normal”
Regulation – capital and liquidity

Regulation capital and liquidity

FirstRand investment case
What is required to outperform given headwinds

SLIDE 9

Regulation and the role of banks in the economy

9

SA BANKING SECTOR

Access to bank operating, payment & clearing Savings flows Borrowings Capital to support risk and guarantee deposits

Savers Borrowers

Cost of credit Cost of attracting Maturity liquidity mismatch savings

Increased regulatory

Cost of capital Cost of liquidity

regulatory cost

Cost of capital requirements

Shareholders require minimum returns

SLIDE 10

The FirstRand investment case

10

Short-term – earnings growth should outperform macros
Medium to long-term – deliver superior, sustainable ROEs

What is required to deliver on these objectives? Financial strength Earnings resilience Financial strength Earnings resilience

SLIDE 11

The FirstRand investment case

11

Short-term – earnings growth should outperform macros
Medium to long-term – deliver superior, sustainable ROEs

What is required to deliver on these objectives? Earnings resilience Financial strength Earnings resilience Financial strength

SLIDE 12

Financial strength...

12

Capital position and management

Capital position and management
Asset quality
Funding strategies
Funding strategies

... but be competitive

SLIDE 13

Financial strength

13

Capital position and management

Capital position and management
Asset quality
Funding strategies
Funding strategies

SLIDE 14

Strong capital position

14

Core Tier 1 ratio 13 8% 13% 14% 13.8% 12.6% Special dividend Expansion 10% 11% 12% Target range: Expansion, regulatory changes, etc.* 8% 9% 10% 9.5 – 11.0% 6% 7% 8% 4% 5% 6% 4% Jun '10 Jun '11

* Illustrative

SLIDE 15

We understand the implications of l t h

15

Assessed impact of Basel 2 5 and Basel III changes

regulatory changes

Assessed impact of Basel 2.5 and Basel III changes
2011 returns and targets (18% – 22%) already reflect increased levels and

quality of capital

Uncertainty remains regarding SARB interpretation (expect clarity in Q1 2012)
Comfortable that 18% to 22% range is sustainable
Private equity businesses already capitalised at higher economic capital level
Lending businesses – started repricing (and agreements allow repricing for

regulatory changes S ( ff )

Subsidiaries capitalised appropriately (no buffer in centre)
Liquidity changes will impact ROEs in term assets – consider new performance

metrics, e.g. liquidity-adjusted ROE metrics, e.g. liquidity adjusted ROE

Africa expansion – punitive treatment of minorities introduces asymmetry

SLIDE 16

Consistent capital management strategy

16

Continue to deploy capital to businesses that meet the required return
Strategic investments that breakeven within an appropriate period
Strategic investments that breakeven within an appropriate period
Businesses required to meet minimum hurdle rates
Internal capital generation sufficient for domestic growth and African

expansion initiatives

If no alternative investment or deployment, capital will be returned to

shareholders

Disciplined approach to growth allows protection of returns
No incremental currency risk equity risk or credit risk is taken in the capital

No incremental currency risk, equity risk or credit risk is taken in the capital investment portfolio

No double gearing
No double-gearing

SLIDE 17

FirstRand’s portfolio – ROA and leverage ratio

17

FirstRand products

ROA

8.0% 9.0% 5 0% 6.0% 7.0% 3 0% 4.0% 5.0%

HomeLoans greatest

1 0% 2.0% 3.0%

FSR FSR

HomeLoans greatest drag on ROA and ROE

1.0%

0.0% 1.0% 5 10 15 20 25 30 35 40

Leverage (times)

SLIDE 18

Focus on improving ROA to deliver superior ROE

18

1.64 1.28 1 14 1.28 0.85 1.14 2007 2008 2009 2010 2011 ROA

SLIDE 19

Change in mix will drive NII growth despite low new business volumes

19

Higher growth in unsecured in retail portfolios results in better

low new business volumes

Higher growth in unsecured in retail portfolios results in better

risk-adjusted margins

Projected portfolio Advances growth Projected portfolio margin ranges Advances growth projected trend Secured FNB HomeLoans 1.5% 0% VAF (WesBank Motor) 5.5% 10% Unsecured Unsecured Mass (Smart & EasyLoans) 35% 25% Consumer (Personal loans) 25% 35%

Despite low retail asset growth (5% – 7%), lending margins could increase

15% – 20% per annum over 3 years 15% 20% per annum over 3 years

SLIDE 20

Dealing with possible excesses

20

Don’t look at capital point-in-time – we take a 3-year view
Given expected low growth in RWAs, current expansion requirements and
ngoing strong capital generation we expect to generate excess capital
Whilst philosophy is not to hold “war chest” for acquisitions, have

appropriate “buffer” for expansion, however, cognisant of ROE drag M h i f t i it l?

Mechanisms for returning capital?

Once-off surplus Ongoing surplus generation Special dividends

r share buybacks

(consider costs to company Dealt with through adjustment in the payout ratio (consider costs to company and shareholders) (must be sustainable)

SLIDE 21

Financial strength

21

Capital position and management

Capital position and management
Asset quality
Funding strategies
Funding strategies

SLIDE 22

Balance sheet reflects financial soundness

22

Nominal* gearing 12 times

5% 6%

C h & h Other assets

7%

RWA/Total assets* = 55%

5% 19% 5%

Tradable securities & other investments Cash & near cash

10%

Oth li biliti O

25% 5%

Ordinary equity Other liabilities Perpetual preference shares Corporate Other net advances

f assets

10% 10% 5% 83%

Deposits and current accounts WesBank retail Other retail Commercial

51%# es = 70%

16% 10%

FNB HomeLoans WesBank retail

Retail = Advance

Assets Equity and liabilities

Based on normalised continuing statement of financial position (Note: derivative assets and liabilities netted off)

# of advances

SLIDE 23

We took the pain earlier and faster

23

First loss is best loss
No restructuring of NPLs to performing

g p g

Focus on workout
QuickSell process in FNB HomeLoans resulted in 50% higher recoveries on

asset values

Properties re-valued at default
Conservative LGDs
Write-off policies
Secured: Upon final recovery on the sale of the asset held as security
Unsecured: Write off 6 months after date of default
Coverage significantly impacted by underlying mix of NPL portfolio
Portfolio impairments were prudent

Lowest market share of NPLs

SLIDE 24

FNB HomeLoans vintage analysis shows lit f b i

24

quality of new business

15% 15% 10% 5% 0% Jun '06 Dec '06 Jun '07 Dec '07 Jun '08 Dec '08 Jun '09 Dec '09 Jun '10 Dec '10 Jun '11 3 months 6 months 12 months

SLIDE 25

How to achieve good returns in residential mortgages

25

Client risk

mortgages

Client risk
Repayment-to-income (RTI)
Expected losses (bad debts)

Expected losses (bad debts)

Asset risk
Pricing
Loan-to-value (LTV)
Area
ROE
Liquidity mismatch
Short vs long
Market share
Non-interest revenue
Earnings volatility
Cost-to-assets

SLIDE 26

We are improving risk profile and pricing

26

1.60% 100% Higher discount

FNB HomeLoans

1.20% 1.40% 70% 80% 90%

s

0.80% 1.00% 50% 60% 70%

stered deals

0.60% 30% 40%

% of regis

0.20% 0.40% 10% 20% Lower

In-force ROE below cost of equity ROE on new business above hurdle rates

0.00% 0% Jan '07 Apr '07 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 Jan '11 Apr '11 A B C D E F G H I A di t t i (RHS) Lower discount A B C D E F G H I Average discount to prime (RHS) Low risk High risk

SLIDE 27

Financial strength

27

Capital position and management

Capital position and management
Asset quality
Funding strategies
Funding strategies

SLIDE 28

We need to understand who will pay for the increased cost of liquidity?

28

increased cost of liquidity?

SA BANKING SECTOR

Access to bank operating, payment & clearing

SA BANKING SECTOR

Savings flows Borrowings Capital to support risk and guarantee deposits

Savers Borrowers

flows Cost of credit Cost of Maturity liquidity mismatch attracting savings

I d

Cost of capital Cost of liquidity i t

Increased regulatory cost

Cost of capital requirements We don’t see further reduction in returns as ROE targets already take hi h i t i t t Potential future cost higher requirements into account

SLIDE 29

SA banking system liquidity gap

29 7% 10% 50%

Liquidity gap Institutional funding proportion

6% 1% 3% 2% 2% 2%

1%
3%
10%

0% 35% 40% 45%

23%
24%
26%
28%
30%
32%

33%

30%
20%

20% 25% 30%

32%
33%
40%

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

Contractual Cumulative Gap BAU Cumulative Gap

15% 20% Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10

FRB SBK ABSA NED BAU cumulative gap Contractual cumulative gap SBSA Contractual Cumulative Gap BAU Cumulative Gap FRB SBK ABSA NED

28% of liabilities mature within 2 months

BAU cumulative gap g p SBSA

28% of liabilities mature within 2 months

Average duration of assets = 44 months

B k h li h t t i tit ti l f di

Sources: SARB BA Returns (December 2010), FirstRand Research

Banks have an over-reliance on short-term institutional funding

SLIDE 30

Increased cost of structural liquidity mismatch

30

9.0 Rate (%)

Asset duration

8.0 8.5 Liquidity premium & statutory costs

120 bps

7.0 7.5

Liability duration

6.0 6.5 Interest base rate

45 bps

5.0 5.5 10 20 30 40 50 60 10 20 30 40 50 60 Months Base interest rate Trasnfer rate including liquidity premium Transfer rate including liquidity premium

A “matched system” will be costly

SLIDE 31

FirstRand’s response

31

Funds transfer pricing
Behavioural pricing for liquidity and deposits
Behavioural pricing for liquidity and deposits
Match-funding for illiquid long dated assets
Minimum client pricing on both sides of the balance sheet

Minimum client pricing on both sides of the balance sheet

Repricing business for current and potential future costs
Funding strategy
New measurement on deposit franchise
New product offering and development
Capital market issuance to extend term of institutional funding
Prepare for convergence
Banks vs principal vs asset management

p p g

SLIDE 32

The FirstRand investment case

32

Short-term – earnings growth should outperform macros
Medium to long-term – deliver superior, sustainable ROEs

What is required to deliver on these objectives? Earnings resilience Financial strength Earnings resilience Financial strength

SLIDE 33

What underpins earnings resilience

33

In 2008/09 the Group embarked on process to rebalance earnings profile
Objectives: to reduce volatility, but continue to deliver superior returns
Diversity
Income streams that provide natural hedges through the cycle
Fee income vs interest income
South Africa vs rest of Africa
Quality
Portfolio composition – appropriate balance between annuity income from client

p pp p y franchises and income driven by trading and investing activities

Di it lit l l tilit Diversity + quality = lower volatility

SLIDE 34

Diversity of earnings

34

5%

Activity*

8%

Geography*

2% 8% 4%

SA Africa & corridors Client Investing

93% 88%

International Trading Franchise† Segment†

FirstRand

45% 16% 43% 8%

Retail Commercial FNB FNB Africa

8% 31% 15% 34%

Corporate FNB Africa RMB WesBank

* Based on gross revenue † Based on PBT, excluding Corporate Centre & consolidation adjustments

SLIDE 35

Balance between NII and NIR

35

Normalised gross revenue breakdown

43% 57% NII before impairments Non-interest revenue 57%

SLIDE 36

Quality of NIR underpinned by client franchises

36

Normalised NIR breakdown

Transactional income 64% Client activity 88% RMB client flows 8% Insurance 10% WesBank associates 1% WesBank associates 1% Other client 5% Private equity 4% Investment & trading 12% Resources 2% Other investment 3% Trading 3%

SLIDE 37

RMB rebalanced its portfolio

37

100% Proportion of gross revenue 24% 29% 8% 80% 90% 100% 32% 24% 60% 70% 80% 68% 32% 40% 50% 39% 68% 10% 20% 30% 0% 10%

2007 2011

Client Investing Trading

SLIDE 38

Quality franchises...

38

FNB – most innovative, best ROE
RMB – leading investment bank in SA
WesBank – market leader in instalment finance
... with compelling growth strategies aligned to Group objectives
In South Africa grow in existing markets and those where currently

In South Africa, grow in existing markets and those where currently underrepresented

To grow African franchises in key markets and mine the investment

and trade corridors

SLIDE 39

FNB – innovation key to growth in customers and volumes

39

In tougher times, innovation becomes a key differentiator

10 f l l f i i i ib i b li

and volumes

10 years of relentless focus on innovation is now contributing to bottom line
Supported by entrepreneurial, owner-manager culture
Current strategy
Focus on building its diversified franchise
Customer acquisition and retention supported by appropriate innovative products

and delivery channels

Repositioning footprint – emphasis on electronic channels

Repositioning footprint emphasis on electronic channels

Value propositions for customers, i.e. loyalty programmes
Enter those market segments where currently under-represented
Mass segment – FNB EasyPlan, eWallet, cellphone banking
Wealth – BJM, Ashburton
Commercial

property finance

Commercial – property finance
Africa and India – on track

SLIDE 40

RMB – excellent franchise will weather t h

40

Strengthening client franchise

tough macros

Strengthening client franchise
Scale trading and investment activities appropriately
Better service large corporates through creation of CIB but protect integrity
Better service large corporates through creation of CIB, but protect integrity
f investment banking franchise
Coverage provides integrated approach

g p g pp

Improving GTS platform a 3-year process
FICC should benefit from increased client flows
Africa and corridors
RMB benefitting from deployment into FNB’s African platforms
African deal pipeline supported by rep offices in Nigeria, Kenya and Angola
India platform supports African deal pipeline through focus on clients active

in African / India Corridor and profitable niches

SLIDE 41

WesBank – unique model underpins k t l d hi

41

Core strategy to protect and grow current local franchise – dominate point

market leadership

gy p g p

f sale through industry partnerships

Target segments where under represented

Target segments where under-represented
Mid corporate
Identified over 1 000 potential customers not currently serviced in wholesale segment

Identified over 1 000 potential customers not currently serviced in wholesale segment

Collaboration with FNB
Large corporate
Collaboration with CIB creating good leads
Full maintenance rentals
Signed initial strategic alliances with Imperial and Toyota
Opportunities in retail private leasing
Africa

Africa

Deploying resources into FNB Africa subsidiaries

SLIDE 42

The Group is making progress on t t

42

cost management

No cost-to-income target, but managing core costs has received significant

focus

WesBank reduced headcount by 32% since 2009
Not a one-size-fits-all strategy – facilitated by business model
Down-sizing in low-growth businesses, i.e. HomeLoans

Si ifi i i h i i h E Pl d Af i

Significant investment in growth opportunities such as EasyPlan and Africa
When aligning C:I methodology with peers our cost to income ratio
When aligning C:I methodology with peers, our cost-to-income ratio

is 53.3%

SLIDE 43

To sum up

43

Can we deliver?

Sh t t i th h ld t f

Short-term – earnings growth should outperform macros
Medium to long-term – deliver superior, sustainable ROEs
We believe we can:
Balance sheet strength

Balance sheet strength

Improved ROA
Diversity and quality of earnings profile

y q y g p

Franchise strength – real competitive advantages in many market segments
Disciplined approach to growing in Africa
Appropriate strategies to deal with the increased cost of regulation