24 Number of debt counselling accounts stabilising t bili i WesBank and HomeLoans debt counselling accounts W B k d H L d bt lli t 25 000 53% 20 000 20 000 74% 15 000 47% 26% 10 000 5 000 0 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
25 Positive trend, but absolute level remains high NPL NPL J Jun ’10 ’10 D Dec ’09 ’09 Jun ’09 J ’09 Percentage of advances 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
and origination actions and origination actions Lower NPL inflows reflect better macro Jul '08 Aug '08 Aug '08 Sep '08 Sep '08 Oct '08 Oct '08 Nov '08 Nov '08 Dec '08 WesBank – Motor division (number of accounts) Dec '08 Jan '09 FNB HomeLoans - New NPLs (value) Jan '09 Feb '09 Feb '09 Mar '09 Mar '09 Apr '09 Apr '09 May '09 May '09 Jun '09 Jun '09 Jul '09 Jul '09 Aug '09 Aug '09 Sep '09 Sep '09 Oct '09 Nov '09 Oct '09 Dec '09 Nov '09 Jan '10 Dec '09 Feb '10 Jan '10 Mar '10 Feb '10 Apr '10 Mar '10 May '10 Apr '10 Jun '10 May '10 Jul '10 Jun '10 26
27 Effective credit and pricing strategies – FNB HomeLoans FNB HomeLoans • New business weighted heavily towards lower risk customers • R Repricing initiative successful even though low risk customers qualify for i i i iti ti f l th h l i k t lif f relatively higher discounts Higher discount discount 100% 100% 90% d deals 80% 70% % of registered 60% 50% 40% % 30% 20% 10% 0% 0% Lower 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 discount Average discount new business A B C D E F G H I WAD New Reg Business Low risk High risk
28 Corporate portfolio resilient Rating distribution: FRB Corporate book 35% June 2009 30% June 2010 25% 20% 20% 15% 10% 5% 0% A / BBB / BB+ / BB- / B+ / B B- / CCC / AAA (zaf) A (zaf) BBB- (zaf) BB (zaf) BB- (zaf) B+ (zaf) B (zaf) 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
29 Growth in client revenue improves quality of earnings lit f i 2007 2010 2% 7% 7% 8% Client activities Investment activities Trading activities 85% 85% 91% 91% Based on gross revenue
30 Quality improvement driven by RMB strategy RMB t t 2007 2010 9% 29% 39% Client activities Investment activities 37% 54% Trading activities 32% 32% Based on gross revenue
31 Geographic diversification – mix changing 2007 2010 4% 4% 10% 7% 5% South Africa Rest of Africa International 85% 89% Based on gross revenue
32 Earnings mix provides risk capacity Normalised NIR breakdown 38% 62% Non interest revenue N i t t Transactional income Client activity Annuity fair value income Net interest income 87% Operational associated income Insurance C Other primary income vestment nd trading Fair value risk income 13% Private Equity Other investment income Other investment income an In
33 Risk profile summary • 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 Strong financial position fi i l i i
34 Modest economic recovery Prospects:
35 South Africa’s GDP growth Y/y % 10 0 10.0 7.5 5.0 2 5 2.5 0.0 F ld Folder: Y:\C - Macro\Macroeconomic pack\201009 Y \C M \M i k\201009 File: Key variables for ppt.xlsx -2.5 Sheet: 1 -5 0 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
36 Cyclical vs structural forces 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
37 SA inflation back in the target band % y/y 20 15 Folder: Y:\C - Macro\macroeconomic pack\201009 10 File: Key variables for ppt Sheet: 2 5 0 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
38 Repo rate below the highway 24 18 6 5 9 5% 6.5-9.5% 12 Folder: Y:\C – Macro\Macroeconomic pack 6 File: Key variables for ppt Sheet: 0 0 79 83 87 91 95 99 03 07 11 Repo rate below the highway – but temporary (short-term range 5.5-7.5%) Source: I-Net and FirstRand Research
39 Asset growth is about affordability 19 Debt servicing cost 18 FRB historical impairment (bps x 10) 17 17 Debt servicing cost threshold 16 120bps impairment tolerance 15 14 13 12 DSC threshold DSC threshold 11 10 9 8 7 6 6 5 4 3 2 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 Max debt- Prime rate Debt/income servicing cost (highway) (implied max) 11% * 10-13% 85% 5yr horizon 2yr horizon * Given the Group’s tolerance for through-the-cycle bad debts 11% 9-11% 100% 85% looks realistic (up from 78%) Source: FirstRand Research
40 Income growth % y/y 45 30 15 0 0 -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
41 Wage increases at the expense of jobs Income growth Employment growth Wage growth Yoy 11.6% 12% 10% 8% 7.1% 7.0% 7 0% 6% 4.5% tion 4% Inflat Inflation 2% 0% % Folder: Y:\C – Macro\Analysis -2% File: Employment & wages -2.6% -4% 4% Sheet: 3 -4.7% -6% Jun'09 Jun'10 Income up due to rising wages (despite unemployment) Source: StatsSA, I-Net , SARB Quarterly Bulletin, FirstRand Research
42 Excess capacity in the corporate sector Real private investment, R'bn 260 260 210 210 Folder: Y:\C - Senior exec\AFS & budgets\201006 File: Extra trend requested for key themes.xlsx Sheet: RpiData 160 160 110 110 60 60 80 83 86 89 92 95 98 01 04 07 10 Source: SARB Quarterly Bulletin and FirstRand Research
43 Slow credit growth % y/y Folder: Y:\C - Senior exec\AFS & budgets\201006 File: Extra trend requested for key themes 40 Sheet: Credit data Corporate 30 20 Total 10 Retail 0 -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
45 In conclusion… • 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 Samantha Balsdon g p
47 Providing resources to back the Group’s strategy strategy FirstRand Group Setting the portfolio strategy Current portfolio Ensure Growth, Business and Business and resources are resources are Identifying trends Identifying trends, demographic, available to action plans opportunities and threats technological, provide for the regulatory, etc. strategy Target portfolio Align with Optimise growth, return, mix Target performance characteristics portfolio to leverage and provide these volatility characteristics targets Target portfolio
48 Contextualising capital strategy Solvency / Tail risk - Earnings Residual risks to earnings g Capital Capital Expected scenario Good scenario Severe scenario Cost base Cost base Very severe Catastrophic Outstanding scenario scenario year Revenue Loss Expected earnings Zero profit Zero revenue Loss at 99.9% Earnings Residual Risks Capital Operating businesses seek to maximise returns within acceptable earnings Capital as buffer against p g p g p g volatility constraints catastrophic outcomes Earnings act as the first buffer Group functions manage and mitigate against losses and financial these where economically feasible “Tail risk to earnings underperformance resilience/sustainability”
49 Capital levels exceed targets and quality is good is good Minimum capital adequacy Capital adequacy June 2010 (%) p q y ( ) 15.6 Max 50% f Primary 14.0 2.1 12.0 -13.5 Lower Tier 2 Sec 11.5 -13.0 Ter % ary Max 100% M condary and 0 9 0.9 of rtiary 2.5% 2.3 2 3 of Prima 1.0 3.5 3.5 Pilla Upper Tier 2 9 5* 9.5 ar 1 and Pilla 1.75 1.75 Primary ax 15% 2.5 Hybrid debt mary 25% instruments ar 2 @ 9.5%* of Prim Ma 12.6 12 6 Max 2 of 10.7 1.75 Non-cumulative Primary m non-redeemable 8.25 preference shares 5.25 7.75 min 7% Ordinary shares of Primary Min 75% and defined reserve funds (core equity) FRB FRB FRB FRB FRBH FRBH FRBH FRBH SARB target actual target actual minimum * Excludes the bank specific (Pillar 2b) add-on and capital floor
50 Strengthening capital position over time 15.6% 60,000 14.6% 13.6% 13.8% 12.8% 15.0% 55,000 7 344 50,000 9 816 9 816 10 0% 10.0% 7 410 45,000 10 222 40,000 5.0% 35,000 0.0% 10 373 30,000 25,000 46 116 -5.0% 41 566 40 612 20,000 36 754 -10.0% 15,000 24 129 10,000 -15.0% 5,000 - -20.0% Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Tier 1 capital (R million) Tier 2 capital (R million) Capital adequacy %
51 The Group backs economic capital with Tier 1 46 116 41 566 41 566 40 612 40 612 36 754 35 947 35 491 35 024 24 129 25 154 19 885 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Economic capital required (Rmillion) Economic capital required (Rmillion) Tier 1 capital (Rmillion) Tier 1 capital (Rmillion)
52 Economic profit returned to positive territory territory % 7,000 15.0 14.6 14 6 6,000 14.5 14.3 14.1 5 639 5,000 14.0 4,000 13.5 3 971 3,000 13.0 13.2 2 719 2,000 12.5 12.4 1 662 1,000 12.0 - - 11.5 11 5 - 474 Jun 06 Jun 07 Jun 08 June 09 June 10 -1,000 11.0 NIACC (R million) NIACC (R illi ) A Average cost of equity (%) t f it (%)
53 Unprecedented number of regulatory changes changes Proposed changes to Proposed changes to Proposed changes to SA Bank Regulations SA Bank Regulations Basel ll framework Basel ll framework 1 January 2012 Minorities Minorities Credit risk scalar Deferred tax assets Securitisations Liquidity ratios Credit valuation Market risk adjustment Asset value correlation Leverage ratio D d Deductions ti Re-securitisations Conservation and countercyclical buffer Impact on risk weighted assets and qualifying capital Impact on risk weighted assets and qualifying capital
54 What’s the “new normal” for core? • 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
55 The regulatory outlook for capital instruments 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 • Permanent write-down P t it d • Conversion into equity • No rating • Investors waiting for certainty
56 Tier 2 call dates R million 2 500 2 110 2 000 1 740 1 500 1 000 1 000 628 440 500 300 100 100 - 5 Nov 2012 6 Dec 2012 15 Sept 2014 10 June 2016 10 June 2017 21 Dec 2018 21 Dec 2018 22 Dec 2018 Lower Tier 2 Upper Tier 2
57 FirstRand Bank’s Tier 2 • E Expect to redeem subordinated debt on call dates t t d b di t d d bt ll d t • • 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
58 Conclusion on capital • 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 y Andries du Toit q g
60 Agenda • 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
62 Liquidity risk management philosophy • Continuous funding and liquidity cycle • Forward looking Forward looking Funds Target • Integrated across transfer risk pricing profile • Macro economic environment • All business units • All financial risk disciplines • Financial markets outlook Financial markets outlook Risk Funding framework profile • Ensure compliance with • Internal risk appetite • Regulatory requirements • Rating agencies requirements Liquidity Stress buffer buffer testing testing • • Output Output • Efficient, diversified, flexible funding • Built on strong relationships
63 Funding & liquidity management: Regulatory impact Regulatory impact
64 External influences on funding strategy • Bank for International Settlement (BIS) • P i Principles for Sound Liquidity Risk Management and Supervision, i l f S d Li idit Ri k M t d S i i 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
65 Basel III – new liquidity rules • 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)
66 ‘Basel III’ – initial amendments (26 July 2010) • 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 • Max 40% tier 2 liquids – other traded securities such as ABS or MBS paper 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
67 Structural funding and liquidity task team • Motto: Better life for all • M Members: ASISA; 5 banks; Banking Association; National Treasury; SARB; b ASISA 5 b k B ki A i ti N ti l T 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 5. Understand the business model of FIs as it pertains to structural funding and 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
68 Macro-prudential limit approach to exchange control exchange control 5.5% 4.8% 4.8% 4.7% 4.7% Feb '10 Feb '10 Mar '10 Mar '10 Apr '10 Apr '10 May '10 Ma '10 J n '10 Jun '10 Average foreign exposure Limit = 25% • • Macro prudential limit of 25% of bank’s total liabilities Macro-prudential limit of 25% of bank s total liabilities • (Excluding shareholders equity) • Applies to SA Authorised Dealers (banks), • N Not SA corporates or other sectors SA h • 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
69 Taylor Rafferty debt investor perception study • Every two years independent research on FirstRand regarding: 1 1. Debt strategy 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
71 Debt profile summary • Strong financial position • Conservative prudential and regulatory requirements C ti d ti l d l t i t • 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
72 FirstRand Bank Ltd’s diversified asset profile asset profile 100% 21 39 39 49 49 Other Other 60 60 90% 95 132 132 Derivatives 115 80% 13 13 15 19 42 17 70% 47 Investments 47 45 41 44 29 60% 38 38 Africa 42 50% 47 46 45 Cash, fixed assets and other 40% 40% Corporate 30% 233 233 20% 257 254 250 Wholesale 10% Retail 0% 2007 2008 2009 2010
73 Rating distribution of advances Rating distribution FirstRand Bank June 2010 25% % 22% 20% 20% 20% 18% 15% 14% % 12% 10% 9% 5% 3% 2% 0% A / BBB / BB+ / BB- / B+ / B B- / CCC / AAA (zaf) AAA (zaf) A (zaf) A (zaf) BBB (zaf) BBB- (zaf) BB (zaf) BB (zaf) BB- (zaf) BB (zaf) B+ (zaf) B+ (zaf) B (zaf) B (zaf) CCC+ (zaf) CCC+ (zaf) Source: FirstRand Pillar III disclosures
74 FirstRand’s advances show an improving rating distribution rating distribution Rating distribution – FirstRand Bank’s lending book 30% 25% 25% 2007-2010 20% Average rating for the book maps to an equivalent BB- (international scale) 15% 10% 10% 5% 0% A / BBB / BB+ / BB- / B+ / B B- / CCC / AAA (zaf) A (zaf) BBB- (zaf) BB (zaf) BB- (zaf) B+ (zaf) B (zaf) CCC+ (zaf) International / Local Rating International / Local Rating 2007 2008 2009 2010 Source: FirstRand annual report & FRBH Pillar III disclosures
75 Stable debt margin after credit impairments impairments 600 350 R bn bps R 550 300 500 500 250 250 450 200 400 150 350 100 300 50 250 - FY06 FY07 FY08 FY09 FY10 Investment Securities Cash & Short Term Funds Advances Interest Margin After Impairements† (RHS) Net interest margin + other annuity income + income from investment securities – impairment charge Advances + investment securities + cash and short term funds Source: FirstRand shareholder circulars
76 FirstRand Bank Limited’s external ratings 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
77 Strong credit enhancement for senior debt investors debt investors 100% 2.2% 2 2% Provisions Provisions 90% 90% 1.9% 80% Profit after tax 0.2% 70% 70% 1 1% 1.1% Upper Tier II 0.6% 60% Sub Debt 50% 50% 481 280 481 280 40% Preference Shares 10% 30% Equity E it 20% Depositors 10% 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)
78 SA banking system liquidity gap • On a contractual basis 10% 6% where retail and where retail and 5% 2% 2% corporate balances are 1% 6% 1% 0% -1% treated as demand 0% -4% there is liquidity in gap there is liquidity in gap -5% in the SA system reflecting the extent of -10% maturity transformation maturity transformation -15% -20% • The SA banking -21% 21% system is however -25% -23% managed on a -26% -30% -28% behaviorally adjusted -29% -31% 31% basis, taking into -35% -34% account the closed -40% rand pool and behavior 1D 2D-7D 8D-1M 1M-2M 2M-3M 3M-6M 6M-1YR 1Yr+ of these demand Contractual Cumulative Gap BAU Cumulative Gap balances Source: SARB BA300 return, June 2010
79 Increased reliance on institutional funding 50% 40% 30% 20% 10% 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
80 Creating appropriate liquidity buffers 14% 14% 12% 10% 8% 6% 4% J Jan-08 08 A Apr-08 08 J l 08 Jul-08 O t 08 Oct-08 J Jan-09 09 A Apr-09 09 J l 09 Jul-09 O t 09 Oct-09 Jan-10 J 10 A Apr-10 10 Buffer Liquidity Statutory Liquidity Increased liquidity buffers by R15bn over FY10 q y y Note: SARB liquid assets definition is very narrow, above consists of government securities of SA & G7 Source: SARB BA returns, June 2010
81 Funding & liquidity management: Liquidity premium Liquidity premium
82 FirstRand's funding curve Term structure of FirstRand’s funding spreads Horizon for Basel III’s NSFR 200 168 170 145 147 150 134 123 135 112 107 121 100 109 78 98 68 65 78 57 45 50 37 54 23 36 31 31 27 22 0 19 12 0 3M 4M 5M 6M 7M 8M 9M 12M 18M 2Y 3Y 4Y 5Y 7Y 10Y 0 14-Oct-10 30-Jun-10 31-Dec-09 30-Jun-09 30-Jun-07 Source: FirstRand Research
83 FirstRand's funding curve 12m Funding Spread 100 90 80 80 70 60 50 40 30 20 10 10 0 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
84 How does SA compare to the US$ market Spread between 12m deposit & swap rate 120 100 80 60 40 20 0 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 -20 SA 12m US 12M Funding Spreads Source: FirstRand Research, Bloomberg Data, Oct 2010
85 Funding & liquidity management: International developments International developments
86 The offshore interbank funding market • While there has been a clear recovery the clear recovery the 140 interbank funding market as measured 120 by the LIBOR-OIS by the LIBOR-OIS spread, the market is 100 still nervous 80 80 • Recent volatility is related to Eurozone 60 sovereign stresses • Since USD LIBOR is a 40 global rate which includes Eurozone 20 20 banks, the stress manifests in LIBOR - Jan-07 Aug-07 Feb-08 Sep-08 Mar-09 Oct-09 May-10 Nov-10 3M USD OIS Spread 3M EUR OIS Spread Source: FirstRand Research, Bloomberg Data, Oct 2010
87 EM investment theme Portfolio flows to emerging markets Asset allocation to emerging markets 18% 550 US$ bn Potential flows resulting from a 1% reallocation of global funds to EM. Share of emerging market 15.9% 485 16% equities in total U.S. holdings This number was exceed before the 450 450 half year to Jun-2010 half year to Jun 2010 14% Share of emerging market equities in world market capitalization 12% 350 10% 8.7% 250 8% 6% 150 4% 2.4% 1.6% 2% 50 0% 1 1991 2 92 93 3 4 94 95 5 6 96 97 7 8 98 9 99 2000 0 01 1 02 2 03 3 04 4 05 5 6 06 7 07 8 08 9 09 2004 2009 -50 Source: FirstRand Research, IMF Statistics, Oct 2010
88 Emerging market investment theme Money flows to bonds, EM stocks in first half By Sujata Rao LONDON | Fri Jul 2, 2010 3:38pm BST (Reuters) - A massive $453 billion (298 billion ( ) ( pounds) fled safe-haven money funds in the first half of 2010, heading for bonds and emerging stocks as investors fretted over the global economy but seemed more confident g y about the developing world's outlook. Source: Bloomberg Data, JSE, Bank of England Financial Stability Report
89 Net global financial flows US$ bn 1000 800 600 400 200 0 -200 -400 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 USA & Canada USA & Canada Japan Japan UK UK Euro area Euro area EM's EM s Source: FirstRand Research, IMF Statistics, Oct 2010
90 South Africa is a beneficiary of EM rotation Net purchases/sales by foreigners 80 80 n 72 72 ZAR b 69 63 61 60 44 40 27 23 19 20 7 - -4 -20 -14 -40 -60 60 -54 -54 -80 2005 2006 2007 2008 2009 2010 YTD Bond Equities Source: FirstRand Research, Bloomberg Data, Oct 2010
91 South African sovereign spreads have contracted have contracted bps 700 700 600 500 400 400 300 Nov-09 Oct-10 10 yr: 190 bps 10-yr: 190 bps 10 yr: 141 bps 10-yr: 141 bps 5-yr: 170 bps 5-yr: 117 bps 200 Jan-07 10-yr: 60 bps 5 yr: 40 bps 5-yr: 40 bps 100 - Jan-07 Jan-07 Jul-07 Jul-07 Jan-08 Jan-08 Jul-08 Jul-08 Jan-09 Jan-09 Jul-09 Jul-09 Jan-10 Jan-10 Jul-10 Jul-10 SA Sov CDS 1Yr SA Sov CDS 5Yr SA Sov CDS 10Yr Source: FirstRand Research, Bloomberg Data, Oct 2010
92 International funding markets 5-year sovereign spreads 1 000 1,000 900 800 700 600 500 400 300 200 100 100 - 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
94 Create efficient, flexible and diversified funding platforms funding platforms Regulated platforms FirstRand Bank, (branches: London, India), African banking platform, (licenced) (licenced) OUTsurance RMB Morgan Stanley OUTsurance, RMB Morgan Stanley Exchanges (LSE, JSE, BESA) Unregulated entities FirstRand Investment Holdings (un-licenced) (un licenced) Private equity Private equity Off-balance sheet Securitisations, conduits / risk transformation platform Bi-lateral (Carlyle) Bi l t l (C l l ) O Own funds f d Private equity (Ethos) P i t it (Eth ) FirstRand structured investments, e.g. RMB / Westport 3 rd party platforms 3 rd party platforms Traditional Traditional • FNB Wealth & RMB Private Bank
95 Strong focus on building a diversified funding base funding base Sources of funding Funding instruments (30 June 2010) ZAR450bn ZAR481bn (CAGR 12%) Other deposits 100% Senior Debt Derivative 7% 5% Conduits 6% 5% Other 7% 3% 3% NCD's 90% (3Y CAGR 9%) 9% 8% Sub Debt 6% 11% 2% 80% Repo's Trading liabilitie Foreign 18% 19% 8% s Funding 17% 70% 1% (3Y CAGR 10%) Securitisation 60% 60% 1% 1% Govt & Govt & Call & savings Parastatal 26% deposits (3Y CAGR -6%) 28% 50% 28% 14% Other 1% Retail 40% Fixed and notic (3Y CAGR 9%) (3Y CAGR 9%) e deposits d it 28% 30% Current account Corporate s 42% 20% 19% (3Y CAGR 6%) 38% 36% 10% Institutional (3Y CAGR 25%) 0% Jun Jun Jun 08 08 09 09 10 10 Incentivise building of retail deposit franchise Source: SARB BA900 returns, June 2010 Sources: SARB BA 100 return & FirstRand Limited annual report
96 Retail and corporate funding strategy key 100% Retail (CAGR 9%) ( ) 13% 13% 14% 14% 14% 14% 15% 15% 90% 10% 11% 80% 12% 11% Commercial (CAGR 4%) 70% 27% 26% 26% Corporate (CAGR 8%) 26% 60% 50% 40% 24% 25% Wholesale (CAGR 10%) 27% 27% 29% 29% 30% 4% 4% 20% 2% Africa (CAGR 15%) 1% 4% 5% Capital markets (CAGR 2%) Capital markets (CAGR -2%) 2% 2% 1% 1% 14% 14% 10% 9% 12% Financial markets (CAGR -1%) Off balance sheet vehicles (CAGR 26%) 6% 5% 5% 3% 0% 2007 2007 2008 2008 2009 2009 2010 2010 Off Balance sheet Financial markets Capital markets Africa Wholesale Corporate Commercial Retail
97 FirstRand – leading bond issuer… 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… April 2010 auction summary: August 2010 auction summary: ZAR million Nominal Cash ZAR million Nominal Cash Total bids 4 296 5 813 Total bids 4 889 4 989 Allocation 2 571 3 340 Allocation 4 199 4 309
98 Diversified listed debt maturity profile FirstRand Bank’s listed debt 5 000 4 500 4 000 3 500 3 000 2 500 2 000 1 500 1 000 500 0 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
99 SA banking sector issuance profile 100% 90% 90% 80% 70% % 60% 50% 40% 30% 20% 34% 10% 17% 17% 13% 13% 0% 0-3yrs 3-7yrs 7yrs + Other Banking Institutions g Investec Nedbank SBSA ABSA FirstRand Source: JSE-BESA Bond Data, Sep 2010
100 Conduits: Assets under management R18 bn R15 bn 100% Indwa 80% 46% 48% 48% 52% 52% 62% 60% Ivuzi 40% 31% 31% 24% 38% 25% 20% 20% Inkhotha 24% 23% 14% 12% 0% 2007 2008 2009 2010
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