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
2 Agenda • Headwinds Headwinds • Macro – “new normal” • Regulation – capital and liquidity Regulation capital and liquidity • FirstRand investment case • What is required to outperform, given headwinds
3 Agenda • Headwinds Headwinds • Macro – “new normal” • Regulation – capital and liquidity Regulation capital and liquidity • FirstRand investment case • What is required to outperform, given headwinds
4 Cumulative build-up of leverage 30% “Golden” years “New normal” 25% 20% 15% 10% 5% Nominal GDP growth y/y Private credit growth y/y 0% -5% Long on credit, short on wealth Source: I-Net Bridge
5 Growth in bank earnings outpaced nominal GDP growth 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 1.0 1.0 0 5 0.5 0 5 0.5 90 92 94 96 98 00 02 04 06 08 10 12 Source: I-Net Bridge
6 Characteristics of “new normal” environment • Sluggish GDP growth • Rising inflation • Ri i Rising unemployment l t • Flat or declining property values • Disposable income under pressure • Low levels of business confidence and activity • Interest rates to remain low L Lower growth and more volatility th d l tilit
7 Macros impact banks • 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
8 Agenda • Headwinds Headwinds • Macro – “new normal” • Regulation – capital and liquidity Regulation capital and liquidity • FirstRand investment case • What is required to outperform given headwinds
9 Regulation and the role of banks in the economy SA BANKING SECTOR Access to bank operating, Savings payment & clearing Borrowings flows Borrowers Savers Capital to support risk and guarantee deposits Cost of credit Cost of attracting savings Maturity liquidity mismatch Increased Cost of liquidity regulatory regulatory Cost of capital Cost of capital requirements cost Shareholders require minimum returns
10 The FirstRand investment case • 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 Financial strength Earnings resilience Earnings resilience
11 The FirstRand investment case • 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 Financial strength Earnings resilience Earnings resilience
12 Financial strength... • Capital position and management Capital position and management • Asset quality • • Funding strategies Funding strategies ... but be competitive
13 Financial strength • Capital position and management Capital position and management • Asset quality • • Funding strategies Funding strategies
14 Strong capital position Core Tier 1 ratio 13 8% 13.8% 14% Special dividend 12.6% 13% Expansion Expansion, 12% regulatory changes, etc. * 11% Target range: 10% 10% 9.5 – 11.0% 9% 8% 8% 7% 6% 6% 5% 4% 4% Jun '10 Jun '11 * Illustrative
15 We understand the implications of regulatory changes l t h • • Assessed impact of Basel 2 5 and Basel III 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 Subsidiaries capitalised appropriately (no buffer in centre) ( ff ) • 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
16 Consistent capital management strategy • 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
17 FirstRand’s portfolio – ROA and leverage ratio FirstRand products ROA 9.0% 8.0% 7.0% 6.0% 5 0% 5.0% 4.0% 3 0% 3.0% HomeLoans greatest HomeLoans greatest drag on ROA and ROE 2.0% FSR FSR 1 0% 1.0% 0.0% -1.0% 0 5 10 15 20 25 30 35 40 Leverage (times)
18 Focus on improving ROA to deliver superior ROE 1.64 1.28 1.28 1 14 1.14 0.85 2007 2008 2009 2010 2011 ROA
19 Change in mix will drive NII growth despite low new business volumes low new business volumes • Higher growth in unsecured in retail portfolios results in better Higher growth in unsecured in retail portfolios results in better risk-adjusted margins Projected portfolio Projected portfolio Advances growth Advances growth margin ranges 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
20 Dealing with possible excesses • Don’t look at capital point-in-time – we take a 3-year view • Given expected low growth in RWAs, current expansion requirements and ongoing 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 Mechanisms for returning capital? h i f t i it l? Once-off surplus Ongoing surplus generation Special dividends Dealt with through adjustment or share buybacks in the payout ratio (consider costs to company (consider costs to company (must be sustainable) and shareholders)
21 Financial strength • Capital position and management Capital position and management • Asset quality • • Funding strategies Funding strategies
22 Balance sheet reflects financial soundness Nominal * gearing 12 times RWA/Total assets * = 55% 6% Other assets 7% 5% 5% Cash & near cash C h & h 10% Tradable securities 19% & other investments 5% 5% Oth Other liabilities li biliti O Other net advances of assets Perpetual preference shares Corporate 25% Ordinary equity es = 70% 83% Deposits and 5% Commercial current accounts 51% # 10% Other retail Advance 10% 10% WesBank retail WesBank retail Retail = 16% FNB HomeLoans Assets Equity and liabilities # of advances Based on normalised continuing statement of financial position (Note: derivative assets and liabilities netted off)
23 We took the pain earlier and faster • 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
24 FNB HomeLoans vintage analysis shows quality of new business lit f b i 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
25 How to achieve good returns in residential mortgages mortgages • • Client risk Client risk • Repayment-to-income (RTI) • Expected losses (bad debts) Expected losses (bad debts) • Pricing • Asset risk • Loan-to-value (LTV) • ROE • Area • Market share • Liquidity mismatch • Short vs long • Earnings volatility • Non-interest revenue • Cost-to-assets
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