Creating and protecting shareholder value - FirstRand BoAML... · Creating and protecting...

Creating and protecting shareholder value

Johan Burger (CEO: FirstRand)

29 January 2016

Agenda

TRACK RECORD OF SUPERIOR RETURNS

TOUGH CYCLE RAPIDLY EMERGING

HOW IS THE GROUP POSITIONED FOR THIS CYCLE?

FOCUS REMAINS ON DELIVERING SUSTAINABLE RETURNS

2

Track record of superior returns…

8 283 10 117

12 730

15 420

18 663

21 286

1 594 2 364

4 163

6 169

8 172 9 694

17.7%18.7%

20.7%22.7%

24.2% 24.7%

-4%

1%

6%

11%

16%

21%

26%

31%

-

5 000

10 000

15 000

20 000

25 000

30 000

2010 2011 2012 2013 2014 2015

Normalised earnings NIACC ROE

2010 comparatives is for FirstRand Banking Group. 3

…relative to peer group

ROE

17.7%18.7%

20.7%

22.7%24.2% 24.7%

13.4% 13.3%14.4% 13.8%

14.7%16.1%

0%

5%

10%

15%

20%

25%

30%

2010 2011 2012 2013 2014 2015

FSR Big 4 (excl. FSR)


Same picture on a through-the-cycle basis

ROE using normalised impairment (105bps)

20.0%

18.0%

20.8%22.3% 22.9% 22.9%

15.6%

13.0%14.3% 14.8%

14.0%14.8%

0%

5%

10%

15%

20%

25%

2010 2011 2012 2013 2014 2015

FSR Big 4 (excl. FSR)


BUSINESS MODEL AND CULTURE

Shareholder value creation driven by consistent and unique approach

THINK AND BEHAVE LIKE SHAREHOLDERS

FRANCHISEVALUE

How is this operationalised?

DEPLOYMENT OF FINANCIAL RESOURCES

MEASURE THROUGH PERFORMANCE MANAGEMENT

6

FRANCHISEVALUE





7



How we think about long-term franchise valueFR

ANCH

ISE

VALU

E

8Franchise value = resilient earnings

Client base Customer base underpins sustainability.

Market-leadingfinancial services franchises

Market-leading operating businesses deliver customers, distribution and products.

Diversified portfolios(operating franchises, segments,

countries, products)

Diversified portfolio reduces volatility from over-concentrations in product lines, segments or activities. Appropriate mix of capital-light and capital-intensive businesses.

Differentiated offerings strengthen competitive

position(innovation)

Differentiation in customer offerings strengthens relative positioning and ensures growth, but only possible through ongoing innovation.

Flexible and brand-neutral platforms(skills, technology, customer bases, distribution, licences)

Platforms provide building blocks to operate across all financial services profit pools.



FRANCHISEVALUE





9

Disciplined financial resource management

• Strategic framework

• Strategy executed through operating franchises

• Achieve appropriate balance between capital-light and capital-intensive businesses

• Risk management framework

• Through-the-cycle approach/ countercyclical origination and capital allocation

• Understand and price for risk

• Risk appetite – minimise volatility

• Performance measurement framework

• Net income after capital charge (NIACC)

• Financial resource management framework

• Capital, funding, liquidity, risk appetite

RISK GROWTH

Balance between risk,

return and growth

RETURN

10

Proactive and dynamic financial resource management

WHAT? WHY?

Group Treasury manages financial resources (capital, funding, liquidity, risk appetite)

Allows operating franchises to focus on operational profits

Group Treasury:• Determines level of capital, capital

structure and gearing• Allocates capital and cost of capital to

business units and sets hurdle rates• Decides on availability and pricing of

funding and liquidity to BUs (funds transfer pricing)

To ensure that BUs price appropriately for financial resources in their underlying business activities, i.e. focus on ROA

Set capital, funding, liquidity and volatility targets

To maintain desired credit rating

Align franchise growth, return and volatility targets to FSR objectives

To ensure Group meets its overall objectives

Financial resource management is linked to macros

To enable Group to be countercyclical in origination and capital allocation

11



FRANCHISEVALUE





12

Business model allows franchises access to all platformswithin appropriate governance frameworks

FirstRand Bank Limited

(FRB)

FirstRand EMA (Pty) Ltd (FREMA)

FirstRand Investment Holdings (Pty) Ltd

(FRIHL)

Ashburton Investments

Holdings Limited

FirstRand Insurance Holdings (Pty) Ltd

BANKINGAFRICA AND

EMERGING MARKETSOTHER

ACTIVITIESINVESTMENT

MANAGEMENTINSURANCE

13

FIRSTRAND ACTIVITY VIEW PER FRANCHISE

TRANSACT LEND INVEST DEPOSITS INSURANCEINVESTMENT

MANAGEMENT

Model also facilitates cross-sell and up-sell for franchises

14

• Culture empowers employees to think like owners/shareholders –employees know and understand:

• Business strategy

• The business case always prevails

• Capital is only deployed to achieve required returns

• Treat company assets as their own

• Remuneration aligned to shareholder value creation

Owner-manager culture aligns employees and shareholders

15

Agenda





16

Macros deteriorating

Real GDP growth very subdued going forward

Above inflation target (average) inflation for next two years

Low nominal GDP growth expected over the medium term

Low real income growth will place pressure on topline and bad debts

Interest rate normalisation to continue (repo)

0% – 1.5%

6% – 7%

5% – 7.5%

0.5% – 1.5%

Peak: 7.75%

17

Agenda





18

7 210

9 857 8 541

5 747

8 283 10 117

12 730

15 420

18 663

21 286

3 971 5 639

2 719

-474 1 594 2 364

4 163 6 169

8 172 9 694

27.6%30.9%

21.3%

13.1%

17.7%18.7%

20.7%22.7%

24.2% 24.7%

-4%

1%

6%

11%

16%

21%

26%

31%

-5 000

-

5 000

10 000

15 000

20 000

25 000

30 000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Normalised earnings NIACC ROE

What has changed since the previous cycle?

We believe the business is more resilientComparatives prior to 2011 are for FirstRand Banking Group.19

Improved balance between risk and return = lower volatility…

RISKVolatility of return profile

GROWTHAbove nominal GDPover the long term

RETURNPremium above cost of capital

ROA 2.13%

ROA 2.47%

ROA1.03%

2007 ROA

1.95%

FNB WesBank RMB FCC20

…resulting in structurally higher and more sustainable ROA

RISKVolatility of return profile

GROWTHNominal GDP + 3% to 5% over

the long term

RETURN18% – 22%

FNB WesBank RMB

2015 ROA

2.12%

21

ROA 3.32%

ROA 1.82%

ROA 1.41%

ROE and ROA at cyclical highs

94%

4%2%

Improved quality of earnings underpinned by growth and mix of client businesses

Based on gross revenue.

85%

8%7%

20152007

Client

Investing

Risk income

22

Driven by proactive strategies in all operating franchises

33%

18%24%

2%

23%

RMB portfolio reflects shift to client businesses

39%

32%

29% Client activities

Investing activities

Proprietary trading activities

Investment management

Based on gross revenue. Excludes RMB Resources, legacy and head office portfolios.

2007 2015

Investment banking and advisory

Corporate and transactional banking

Markets and structuring

Total client = 75%

23

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2007 2008 2009 2010 2011 2012 2013 2014 2015

-1 000

0

1 000

2 000

3 000

4 000

5 000

2007 2008 2009 2010 2011 2012 2013 2014 2015

SA retail VAF Personal loans Corporate VAF

MotoNovo Other international

WesBank improved risk-adjusted returns and diversification

Balance between risk, return and growth

• Better pricing for risk and improved risk

profile should result in less volatile return

profile vs. previous cycle

Franchise value

• Diversification of products

• MotoNovo, personal loans and

corporate

• Differentiated

• Retail VAF – unique distribution model

(partnership models)

• Access different distribution

channel/client bases through Direct Axis

• Efficiencies

• ROA also benefited from turn-around at

MotoNovo

PBT (R million)

ROA

24* MotoNovo was previously known as Carlyle Finance.# ‘Other International’ includes WorldMark Australia and MotorOne Finance Australia.

#*

FNB grew its transactional and deposit franchises

-

50

100

150

200

250

300

350

2007 2008 2009 2010 2011 2012 2013 2014 2015

12% CAGR

FNB SA deposits (R billion)

-

1 000

2 000

3 000

4 000

5 000

6 000

Personal loans Residentialmortgages

Card Transactionaland other retail

2012 2013 2014 2015

FNB retail normalised profit before tax (R million)

17% CAGR

25

Strategy shift from credit-led to transactional- and liability-led.

Adjusted credit appetite and improved pricing across retail portfolios

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15

A B C D E F

% o

f reg

iste

red

dea

ls

Low risk High risk

(e.g. FNB HomeLoans)

Average DISCOUNT to Prime: – 1.50% Average PREMIUM above Prime: 0.25%

26

53% 55% 47% 47% 45% 43% 41% 40%

5% 5%5% 5% 6%

7%7%

7%37% 35% 43% 42%43%

44%

46%45%

5%5% 5%

6%

6%

6%

6%

8%

-

100

200

300

400

500

600

700

800

900

2008 2009 2010 2011 2012 2013 2014 2015

Advances portfolio rebalanced for more appropriate mix between corporate and retail

Retail secured Corporate FNB Africa and otherRetail unsecured

Gross advances (R billion)

27

Started early with prudent provisioning

0

1 000

2 000

3 000

4 000

5 000

6 000

7 000

8 000

9 000

2013 2014 2015

Portfolio impairments (R million)

Franchise portfolio impairments

Central overlay

2015 2014

Portfolio impairments as % of performing book

1.00% 1.05%

Bad debt charge 0.77% 0.83%

Portfolio impairments (R million)

7 760 7 259

Franchise overlay28

658

1 059

0

200

400

600

800

1 000

1 200

2008 2015

60

155

0

20

40

60

80

100

120

140

160

180

2008 2015

Balance sheet more liquid…

CAGR 7%

Total assets (R billion)

CAGR 15%

Cash and liquid assets (R billion)

9% of total

assets

14.7% of total assets

29

…with reduced reliance on institutional funding and improved funding mix

36%

44%

34%15%

19%

14%

15%

16%

17%

18%

19%

20%

30%

32%

34%

36%

38%

40%

42%

44%

46%

48%

50%

Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15

Retail (RHS)

Corporate and public sector

Institutional funding

% of total funding Retail as % of total funding

30

0%

2%

4%

6%

8%

10%

12%

14%

Column2 X Column1

Stronger capital position despite more punitive RWA requirements

12.9%

14.0%

R12.2bnsurplus

SARB end-state minimum

requirement8.5%

CET1 target range: 10% – 11%

CET1 ratio as at 30 June 2015

FSR management buffer 2.5%

Regulatory EconomicTarget

Economic view of surplus adjusted for:• Volatile reserves• Trapped capital• Regulatory changes

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Agenda





32

Despite short-term pressures, continue to execute on stated growth strategies

Transact

Lend

Invest

Insure

Transact

LendInvest

Insure

CURRENT REVENUE MIX WE WOULD LIKE REVENUE MIX TO LOOK MORE LIKE THIS…

33

Rest of Africa still represents opportunity for growth, but need to navigate elevated risks

• Higher risk, but higher growth than SA

• Namibia and Botswana dominate current contribution

• Focus has shifted to building in-country franchises in chosen markets

South Africa88%

Rest of Africaand corridors

10%

Other2%

34

• Macros very difficult, but franchise well prepared for short-term pressures

• ROA/ROE structurally higher than previous cycle; ROE expected to trend down into the target range (18% to 22%)

• Strong balance sheet

In summary

FirstRand’s return profile is resilient, but not immune to cycles

35

Creating and protecting shareholder value - FirstRand BoAML... · Creating and protecting...

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