Debt Investor Presentation November 2009
Agenda FirstRand and Group Treasury Funding & Liquidity Risk Management Capital Management 2
Agenda FirstRand and Group Treasury Funding & Liquidity Risk Management Capital Management 3
FirstRand s Balance Sheet Management Pillars of Balance Sheet Management Capital Management Capital planning Capital allocations Economic capital process 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 Devise and implement hedges to protect t the groups balance sheet and earnings Group Treasury Funding & liquidity management Manage the liquidity risk of the group Devise and implement group s funding strategy Multicurrency funds transfer pricing 4
Group Treasury Group Treasury Set Strategy, Risk Appetite & Framework Centralised Treasury Functions Funding & Liquidity Management Exchange Control Finance Group Treasury Desk Alternative Funding Strategies Multi Currency Funds Transfer Pricing Treasury ALM African Subsidiaries Strategic Relationship Management International Branches Integrated Approach to Funding 5
Agenda FirstRand and Group Treasury 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 7
Funding and liquidity management Liquidity idit risk is the risk that t the bank will not be able to meet all payment obligations 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 of 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 This is managed as part of Group Treasury 8
Banks are in the business of maturity transformation Core Function of Banks in an Economy Cost of Liquidity idit Risk Maturity transformation is the defining aspect of banking Short term funded Long term lender The resultant liquidity risk has to be managed In the context of Statutory liquidity requirements Risk appetite Cost Competitiveness There are costs incurred for running liquidity risk Statutory Cash reserves on deposit with the SARB Carry cost of statutory liquid assets Cost of term funding in order to meet statutory minimum liquidity gap Board prudential limits SA Inc s structural supply of money Risk appetite Cost of term funding in order to meet liquidity gap targets set by the Group 9
Liquidity risk management philosophy Funding Profile Funds Transfer Pricing Liquidity Buffer Target Risk Profile Stress Testing Risk Framework Continuous funding and liquidity cycle Integrated across All financial risk disciplines Macro economic environment All business units Financial markets Forward looking Ensure compliance with Internal risk appetite Regulatory requirements 10
Macroeconomic influences on funding 11
Growing balance sheets in excess of income Total Private Credit to GDP 200% United States 150% Switzerland Spain 100% Germany South hafrica 50% United Kingdom Credit growth in excess of GDP Growth De-leveraging has begun 0% De De De De De De De De De De De c-60 c-65 c-70 c-75 c-80 c-85 c-90 c-95 c-00 c-05 c-10 Source: World Bank 2007, Extended SA & US, Bloomberg, June-2009 12
Credit extension supported M3 Credit extension & bank assets Money supply & credit extension 100% 30% 30% 90% 25% 25% 80% 70% 20% 15% 10% 20% 15% 10% 60% 5% 5% 50% Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 0% 0% 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 M3 Y/Y House Hold Credit Extension Y/Y Private sector credit extension (PCE) as a percentage of SA banking system assets is relatively stable at 80%. In the context of the volatile PCE y/y growth this suggests that banks are the primary funders of PCE. Source: inet Data Service 13
Banks monetised foreign liquidity Current account deficit & PCE Foreign investment & PCE 10-600 250-50 500 200-10 400-20 100 300 150-30 -40 150 200 100-50 200 100 50-60 Mar-90 Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 250 0-100 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) Cumulative FDI & Portfolio Investment Total Private Credit Extension (RHS) Source: inet Data Service 14
Increased reliance on professional 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 FRB SBK ABSA NED Source: SARB BA Returns 15
Funding pressures demand for credit Total Private Credit to GDP ratio Index, 1970 =1 18 1.8 1.6 1.4 Trend Nominal GDP vs government revenue y/y 30 25 20 15 10 5 1.2 0 Credit/Nom GDP -5 1-10 -15 0.8 70 75 80 85 90 95 00 05 10 Dec-9 93 Nov-9 95 Nov-9 97 Nov-9 99 Nov-0 01 Nov-0 03 Nov-0 05 Nov-0 07 Nominal GDP growth Government revenue growth Source: inet Data Service 16
Funding pressures government Government debt/gdp ratio SOEs borrowing requirement % 55 50 45 40 35 30 25 180 160 140 120 100 80 60 40 20 Ma ar 80 Ma ar 82 Ma ar 84 Ma ar 86 Ma ar 88 Ma ar 90 Ma ar 92 Ma ar 94 Ma ar 96 Ma ar 98 Ma ar 00 Ma ar 02 Ma ar 04 Ma ar 06 Ma ar 08 Ma ar 10 Ma ar 12 20 0 2009 2010 2011 2012 2013 Government debt/gdp National Treasury forecast OTHER SANRAL TRANSNET ESKOM Source: inet Data Service & National Treasury 17
The funding market Array of issuers SOEs dominate term issuance Rbn 24 20 16 Standard Bank Basil Read Omnia FirstRand COJ Unitrans ABSA Bidvest Denel Gold Fields Netcare Unilever ACSA Toyota FS Transnet Mercedes-Benz AngloAmerican Increased competition for funding in short term space from corporates with CP programmes Rbn Securitisations SOEs Municipal Corporates 36 Banks / Financials 32 28 24 20 SOEs have entered the capital market in a big way especially in the long term space 12 8 4 16 12 8 4 0 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 0 4Q Q06 1Q Q07 2Q Q07 3Q Q07 4Q Q07 1Q Q08 2Q Q08 3Q Q08 4Q Q08 1Q Q09 2Q Q09 3Q Q09 4Q Q09 Source: RMB FICC Research, 30 September 2009 18
The private sector Household savings Private sector investment 25% 2.5% 20% 2.0% 15% 1.5% 1.0% 10% 0.5% 5% 0.0% 0% Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-9 Mar-9 Mar-0 Mar-0 8 9 0 1 Mar-02 Mar-03 Mar-04 Mar-0 5 Mar-06 Mar-0 Mar-0 Mar-0 7 8 9-0.5% -5% -1.0% -1.5% -10% -2.0% Household Savings/Disposable Income Real Private Sector Investment y/y -15% Source: inet Data Service 19
Funding base 500 450 32% 35% 30% 400 350 25% 25% 300 250 13% 16% 20% 15% 200 10% 150 100 50 0% 5% 0% 0 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-09 Prof Corporate Retail Gov & PSE's Other Annualised Growth (RHS) -5% Source: 31-Aug- 2009 SARB BA Returns 20
Long term SA banks 1-year funding spread SA Banks 1 Year Funding Spreads Consider the 1-year NCD vs swap as a principal 120 component in explaining the funding curve. 110 100 1 year funding spreads, 90 were in the range 20-30 80 bps for 3 years from 2004 to 2007 70 60 50 40 30 20 10 0 Jan-03 May-04 Sep-05 Feb-07 Jun-08 Nov-09 15 Day MA Funding Spreads 1y 125 Day MA Source: inet Date Service 21
Comparing SA to US banks 1-year spreads Spread to Swaps 1-Yr US v SA Bank Spreads 250 200 150 100 50 Comparing the US to SA 1- year bank funding spreads. US spreads widened more severely than in SA. US spreads have also narrowed more aggressively. This highlights a divergence in funding pressure. 0 50 Sep 2002 Sep 2003 Aug 2004 Aug 2005 Aug 2006 Aug 2007 Aug 2008 Aug 2009 The US Fed is providing excessive liquidity in the short end, while in SA National Treasury is in fact competing for the liquidity. US Banks AA 1 Yr Spread MA Source: Moody s Investor Research & inet Data Service SA 1 Yr Spread MA 22
External influences 23
External influences on strategy Macro economy, SA Inc and financial markets Regulatory Basel II focused largely on credit risk Focused the attention of banks and regulators mostly on credit risk Bank failures have proved to be as a result of liquidity idit risk No sensible amount of capital can protect a bank from a liquidity event Bank for International Settlement (BIS) Principles for Sound Liquidity Risk Management and Supervision, August 2008 Financial Services Authority (FSA) IMF PS 09/16: Strengthening Liquidity idit Standards, October 2009 Report on SA Banking System, September 2009 South African Reserve Bank Rating agencies Exchange control prudential requirements 24
FirstRand s s Response 25
SA banking liquidity gap 2,000 Business as usual gap BAU Maturity of Assets 1,500 BAU Maturity of Liabilities BAU Cumulative Gap 1,000 0% 0% 500-1% 213 175 53 0-78 -203-204 -500-3% 90 96 6% 1,792 5% 4% 2% 0% -2% 300 195-4% -4% -6% -147-131 -272-8% -7% -441-10% -1,000-12% -12% -1,500-1,300-14% Contractual maturity gap 2,000 Contractual Maturity of Assets 1,500 Contractual Maturity of Liabilities 1,000 Contractual Cumulative Gap 468 500 184 68 86 85 154 0-20% -126-158 -117-21% -178-500 -377-28% -1,000-1,063-1,500 10% 1,712 5% 4% 0% -5% -10% 211-15% -20% -334-25% -486-30% -30% -31% -32% -35% -36% -40% Liquidity risk is largely managed on a business as usual (BAU) basis However under stressed conditions the BAU conditions no longer apply. Source: SARB BA Returns The contractual maturity profile is also managed within the context of the structure of the SA economy 26
Matching funding to liquidity of assets 100% 90% 80% 70% Cash, 14 Collateral Trading, 23 Equity, 34 Collateral Trading, 33 Other, 53 Term Debt,17 Other, 9 Trading Assets, 88 Trading Liabilities, 59 60% 50% 40% Loans, 374 Deposits, 409 30% 20% 10% 0% Assets Equity and Liabilities i Source: SARB BA 100 Return & FirstRand Limited Annual Report 27
Portfolio of funding instruments Other Deposits 9.2% Derivative 7.9% NCD's 7.7% Repo's 60% 6.0% Securitisation 5.3% OtherTrading Liabilities 3% Senior Debt 2.0% Sub Debt 1.5% Conduits 0.7% Savings Deposits 0.4% Call Deposits 13.1% Fixed & Notice Deposits 25.3% Current Account 18.2% Source: SARB BA 100 Return & FirstRand Limited Annual Report 28
Funding initiatives Domestic International Retail product development Structured Notes Institutional funding How can we help you? International platforms London branch Middle East presence Africa (7 countries ex SA) Australia Indian branch Products Listed programmes in international markets Wholesale deposits Structured notes 29
Agenda FirstRand and Group Treasury Funding & Liquidity Risk Management Capital Management 30
Capital strategy in line with Basel II developments 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 account the effects of Basel II pro-cyclicality and IFRS Stress testing ti Capital strategy subject to stress testing 31
FRB capital position remains robust Capital adequacy (%) 13.11 2.41 1.08 12.28 2.83 1.04 Tier 1% Total % Capital adequacy ratio 10.70 13.11 Regulatory minimum 7.00 9.50 9.62 8.41 Target 9.50 11.50 13.00 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 3,000 2,500 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 FRB05 FRBC21 FRBC220 2,000 1,500 1,000 FRB01 FRB02 FRB06 FRB07 FRB03 500 0 FRB08 FRB09 2010 2012 2014 2016 2017 2018 33
FirstRand Bank Limited external ratings Firstrand Bank Limited Foreign currency counterparty credit rating Moody s Investor Service Long term A3 Short term P-2 Outlook Stable Local currency counterparty credit rating Long term A2 Short term P-1 Outlook Stable National scale bank deposit ratings Long term issuer default rating Aa1.za Short term issuer default rating Outlook Aa2.za P-1.za Stable Bank Financial i lstrength th Rating C- Outlook Stable Firstrand Bank Limited Foreign Currency Long term issuer default rating Short term issuer default rating Outlook Local currency Long term issuer default rating Outlook National Long term rating Short term rating Outlook Fitch Ratings BBB+ F2 Negative BBB+ Negative AA(zaf) F1+(zaf) Negative Individual rating C Support rating 2 Support rating floor BBB- Standard Firstrand Bank Limited & Poor s Foreign currency counterparty credit rating Long term BBB+ Short term A-2 Outlook Negative Local currency counterparty credit rating Long term BBB+ Short term A-2 Outlook Negative 34
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Debt Investor Presentation