Recent history - FirstRand

• Recent history• Simple down cycle model

Predictability is vital• Predictability is vital• The shock• Why the current cycle is different• Management actions• Where are we goinge e a e e go g

THIS IS WHAT HAPPENED IN THE LAST 6 YEARS…THIS IS WHAT HAPPENED IN THE LAST 6 YEARS…

18%

Sep-02

16%

17%Sep 02

Jun-03Jun-08

Recovery ?3

14%

15%

me

rate

Oct-07Dec-07

Apr-08

Crunch2

12%

13%

Prim Sep-03

Dec-06 Jun-07

Aug-07

Growth1

11%

12% Oct-03Dec-03

Aug-04 Apr-05 Jun-06

Aug-06Oct-06

10%50% 55% 60% 65% 70% 75% 80%

Debt-to-Household-Income

THE GROWTH PHASE WAS EXCEPTIONALLY GOOD –THE LARGEST IN SA HISTORY SINCE WWII

THE GROWTH PHASE WAS EXCEPTIONALLY GOOD –THE LARGEST IN SA HISTORY SINCE WWII

Passenger and Commercial Vehicles sales Units per quarterPassenger and Commercial Vehicles sales Units per quarter

More than200,000

More than doubling of

vehicles sales in only

3150,000

3 years

100,000

50 000Flat vehicle unit sales

50,000

0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

GROWTH WAS ALSO REFLECTED IN ASSET PRICES, CREATING A ‘WEALTH EFFECT’

GROWTH WAS ALSO REFLECTED IN ASSET PRICES, CREATING A ‘WEALTH EFFECT’

Normalised house price Real house price, 1990 = 100%Normalised house price Real house price, 1990 = 100%

250%

Doubling of real house Similarly JSE

200% prices in same period

Similarly, JSE index

quadrupled from 03 to 07

150%

100%

Flat real house prices50%

0%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

WESBANK BENEFITTED FROM THE HUGE GROWTH …WESBANK BENEFITTED FROM THE HUGE GROWTH …Annual WesBank New Business production RbAnnual WesBank New Business production RbAnnual WesBank New Business production RbAnnual WesBank New Business production Rb

5160 Growth funded by

increase in household

41

51

40

50increase in household debt from 53% to 78%

of income

20 22

2930

10 1317

10

20

01999 2000 2001 2002 2003 2004 2005 2006

PREDICTABILITY IS VITAL …PREDICTABILITY IS VITAL …

“The US and world economies may

“ We believe a super cycle isy

have entered a new era of low interest rates“

super cycle is underway, driven

by materials’ intensive

i th

Alan Heap

economic growth in China”

Rich Miller (BusinessWeek Washington) 2005

Alan Heap,(citigroup) 2005

(Unknown) “This is a(Unknown)

“Never before have l

This is a commodity super cycle, and it will be the biggest

so many people improved their

living standard by such a margin”

commodity super cycle in history to

date.”such a margin

James Finch 2006

THE SHOCKTHE SHOCK

“Oil will breach $100 a b l” (A j M ti 2007)

“ CPIX expected to peak at 12% in the thirdbarrel” (Arjun Murti - 2007)

“Oil prices are likely to rise to between $150 to $200 in the next six to 24 months”

at 12% in the third quarter of 2008 and

only ease back within the target band by the the next six to 24 months

(Arjun Murti – 2008)

SARB 2008

third quarter of 2010”

FEG Consulting

Goldman Sachs

SARB 2008 G Co su t g2008

Trevor Manuel 2007

“The global food crisis is now common knowledge. Since

the start of 2006 the average“Financial crises in developed

countries’ markets, global i b l hi h f d d il the start of 2006, the average

world price for rice has risen by 217%, wheat by 136%,

maize by 125% and soybeans

imbalances, high food and oil prices internationally and

slowing growth in the United States and other developed countries ‘cloud the sky’”

Source: WesBank

by 107%”y

RESULTING IN MASSIVE INCREASE IN DEFAULT RATES UP TO THE PEAK OF THE CRUNCH …

RESULTING IN MASSIVE INCREASE IN DEFAULT RATES UP TO THE PEAK OF THE CRUNCH …

Probability of Default per Decision Bucket25%

20%

25%

216%

PD % increase from Jun2004 to Jun2008

15%

211%213%

250%

10%201%

170%

151%

5%109%

181%

Jun2004 Jun2006 Jun2008

0%A1 A2 A3 A4 A5 D1 D2 D3 NS

* Note, LGD provides further differentiation between best and worst risk grades, expected loss in worst bucket ~20x best bucket opposed to ~10x difference in PD

Jun2004 Jun2006 Jun2008

Repo asset value to accounting balanceRepo asset value to accounting balance… AND POORER ASSET RECOVERIES AS DEMAND WANED… AND POORER ASSET RECOVERIES AS DEMAND WANED

Downturn

p gp g

Downturn recoveries Recoveries depressed Downturn recoveries elevated due to

Rand depreciation linked vehicle

inflation

– retail downturn with limited vehicle

inflation

THE END RESULT IS A CYCLICAL RETAIL BAD DEBT CHARGE

THE END RESULT IS A CYCLICAL RETAIL BAD DEBT CHARGE

2 5%

Bad debt p.a., WesBank MotorBad debt p.a., WesBank Motor

2.2%

2.0%

2.5%

1.5%

1.7%

1.2% 1 2%

1.6%1.4%1.4%1.5%

1.0%

1.2% 1.2%

1.0% 0.9%

0.6% 0 6% 0 6%

1.0%0.9%1.0%

0.6% 0.6%

0.5%

0.0%1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

CrunchGrowthRecoveryCrunchGrowth

THE CURRENT CYCLE IS DIFFERENT AND WORSE THAN 98 …

THE CURRENT CYCLE IS DIFFERENT AND WORSE THAN 98 …

19981998 20082008• Preceding period of flat or no

growth• Preceding period of flat or no

growth

19981998• Largest post WWII growth

period• Largest post WWII growth

period

20082008

• Preceding period of volatile interest rates

• Preceding period of volatile interest rates

• Preceding period of extremely low interest rates (for SA)

• Preceding period of extremely low interest rates (for SA)

• Moderate debt-to-income levels of 60%

• Moderate debt-to-income levels of 60%

• Record debt-to-income levels near to 80%

• Record debt-to-income levels near to 80%

• Relatively flat oil and food prices

• Relatively flat oil and food prices

• Record oil and food prices

• Emergence of significant new middle class consumer

• Record oil and food prices

• Emergence of significant new middle class consumer

• Little demographic change in customer base

• Little demographic change in customer base

middle class consumer demographics

• Major new consumer

middle class consumer demographics

• Major new consumer• No major regulatory change• No major regulatory change

Major new consumer legislation enacted (NCA)Major new consumer legislation enacted (NCA)

• Recent• History

Simple down cycle• Simple down cycle• Predictability is vital• The shock

ff• Why the current cycle is different• Management actionsa age e t act o s• Where are we going

MANAGEMENT ACTIONS FOR THE CURRENT CYCLE STARTED AS FAR BACK AS THE END OF 2005!

MANAGEMENT ACTIONS FOR THE CURRENT CYCLE STARTED AS FAR BACK AS THE END OF 2005!STARTED AS FAR BACK AS THE END OF 2005!STARTED AS FAR BACK AS THE END OF 2005!

WesBank started slowly tightening Credit policy and scorecards from the end of 2005, which in retrospect showed great foresight –unfortunately the depth of the crunch was not foreseen otherwise deeper tightening during Q4 06 to Q3 07 especially of high risk


Credit tightening

deeper tightening during Q4 06 to Q3 07, especially of high risk businesses should have been performeddeeper tightening during Q4 06 to Q3 07, especially of high risk businesses should have been performed

THE FIRST MANAGEMENT ACTION WAS TO PROACTIVELY TIGHTEN ALREADY IN 2005 – WELL BEFORE THE END OFTHE FIRST MANAGEMENT ACTION WAS TO PROACTIVELY TIGHTEN ALREADY IN 2005 – WELL BEFORE THE END OFTIGHTEN ALREADY IN 2005 WELL BEFORE THE END OF

THE GROWTH CYCLE … TIGHTEN ALREADY IN 2005 WELL BEFORE THE END OF

THE GROWTH CYCLE …

80

Period of sustained tightening

Introduction of NCA/

New scorecards

Period of being deeper in the market

70 RecalibrationProblems at

bureaux

RecalibrationProblems at

bureaux60

bureauxbureaux

40

50

30

40

04 04 04 04 04 04 05 05 05 05 05 05 05 05 05 05 05 05 06 06 06 06 06 06 06 06 06 06 06 06 07 07 07 07 07 07 07 07 07 07 07 07 08 08 08 08 08 08 08

Jul 0

Aug

0Se

p 0

Oct

0N

ov 0

Dec

0Ja

n 0

Feb

0M

ar 0

Apr

0M

ay 0

Jun

0Ju

l 0A

ug 0

Sep

0O

ct 0

Nov

0D

ec 0

Jan

0Fe

b 0

Mar

0A

pr 0

May

0Ju

n 0

Jul 0

Aug

0Se

p 0

Oct

0N

ov 0

Dec

0Ja

n 0

Feb

0M

ar 0

Apr

0M

ay 0

Jun

0Ju

l 0A

ug 0

Sep

0O

ct 0

Nov

0D

ec 0

Jan

0Fe

b 0

Mar

0A

pr 0

May

0Ju

n 0

Jul 0

THIS WAS DONE REGARDLESS OF THE IMPACT ON MARKET SHARE …

THIS WAS DONE REGARDLESS OF THE IMPACT ON MARKET SHARE …

40

35

40WesBankStandard Asset FinanceAbsaNedbank/MFCOtherCash

25

30

15

20

5

10

0

Jul-

05

Aug-

05

Sep-

05

Oct-

05

Nov-

05

Dec-

05

Jan-

06

Feb-

06

Mar-

06

Apr-

06

May-

06

Jun-

06

Jul-

06

Aug-

06

Sep-

06

Oct-

06

Nov-

06

Dec-

06

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

* May/June decline also partly attributed to re-pricing, which raised margin, but resulted in loss of especially very low priced business





Credit tightening


Re-pricing, especially of high-risk business, is a critical part of restoring profitability and has been successfully achieved across Motor, Loans and Corporate


Re-pricing

WESBANK MOTOR MARGIN AND PROJECTED PROFITABILITY SHOWS THE POSITIVE IMPACT OF

WESBANK MOTOR MARGIN AND PROJECTED PROFITABILITY SHOWS THE POSITIVE IMPACT OF

SIGNIFICANT RE-PRICINGSIGNIFICANT RE-PRICINGCombined Interest and Non-Interest Yield for Motor Division in Month of

Origination % ProjectedCombined Interest and Non-Interest Yield for Motor Division in Month of

Origination % ProjectedOrigination % ProjectedOrigination % Projected





Credit tightening




Re-pricing

Reducing volume and margin requires significant attention on cost t i t hi h h b hi d ith i i l i i

Reducing volume and margin requires significant attention on cost t i t hi h h b hi d ith i i l i iC t f containment, which has been achieved with minimal increase in

spend from the 07 to 08 financial yearscontainment, which has been achieved with minimal increase in spend from the 07 to 08 financial years

Cost-focus

WesBank Cost to IncomeWesBank Cost to IncomeSouth African Inst/Fin BusinessSouth African Inst/Fin Business

Cost to IncomeCost to Income

60.00%

40.00%

50.00%

20.00%

30.00%

0.00%

10.00%

2003 2004 2005 2006 2007 2008

Cost to Income Poly. (Cost to Income)

WesBank Cost to AssetsWesBank Cost to AssetsSouth African Inst/Fin BusinessSouth African Inst/Fin Business

Cost to Assets

South African Inst/Fin BusinessSouth African Inst/Fin Business

2.50%

3.00%

2.00%

1.00%

1.50%

0.00%

0.50%

0.00%2003 2004 2005 2006 2007 2008

Cost to Assets Poly. (Cost to Assets)

VARIOUS CREDIT PRODUCTS AS THEY HAVE COME UNDER PRESSURE IN THIS CYCLE

VARIOUS CREDIT PRODUCTS AS THEY HAVE COME UNDER PRESSURE IN THIS CYCLEUNDER PRESSURE IN THIS CYCLE…UNDER PRESSURE IN THIS CYCLE…

MIDMARKETLOANS

CREDITCARDS

LUXITEMS

USEDCARS

NEWCARS

HOME-LOANS

CORPLOANS

LOANS

MANAGING THE DOWN CYCLEMANAGING THE DOWN CYCLE

• Sail with an experienced crew• Sail with an experienced crew

• Pull management team together and talk and act with one voice

• Face realities

• Pull management team together and talk and act with one voice

• Face realities• Face realities• Repricing• Advances book

• Face realities• Repricing• Advances book

• Don’t panic• Management must at least appear to be in control

• Don’t panic• Management must at least appear to be in controlManagement must at least appear to be in control

• Budget vs reality

Management must at least appear to be in control

• Budget vs reality

• Take early decisions on cost-cutting• Take early decisions on cost-cutting

MANAGING THE DOWN CYCLEMANAGING THE DOWN CYCLE

• Create a positive visionO i

• Create a positive visionO i• Over communicate

• Motivate your people• Put your arms around your best people

• Over communicate• Motivate your people• Put your arms around your best peopley y p p

• External / internal focus• Roadshow

y y p p

• External / internal focus• Roadshow• Roadshow• Over communicate• You can’t manage what is not on your books

• Roadshow• Over communicate• You can’t manage what is not on your books

Create the right platform for the future

• Test the water early on the way up• Test the water early on the way up

• Don’t build fat on the upswing• Don’t build fat on the upswing

Be patient for Growth,Be patient for Growth,BUT impatient for ProfitBUT impatient for Profitpp

ARREAR TRENDS SHOWING IMPROVEMENT ACROSS ALL ARREAR BUCKETS – MOTOR ARREARS DECLINING

ARREAR TRENDS SHOWING IMPROVEMENT ACROSS ALL ARREAR BUCKETS – MOTOR ARREARS DECLININGALL ARREAR BUCKETS – MOTOR ARREARS DECLINING

NOW FOR 6 MONTHSALL ARREAR BUCKETS – MOTOR ARREARS DECLINING

NOW FOR 6 MONTHSTotal Bank Arrears (Month End)Total Bank Arrears (Month End)

7 47.77.77 67.77 67 58

9

7.37.47.77.67.77.67.56.96.66.56.3

5.45 36

7

8

1+2+35.45.35.1

4.54.54.33.63.63.83.83.83.73.63.4

3 14

5

%

3+6+

3.12.92.72.52.22.11.81.71.61.6

1.91.92.02.01.91.91.71.61.51.31.21 12

3

1.21.10.90.80.70.70.70.7 0.30.30.30.30.30.30.30.20.20.10.10.10.10.10.10.10.10.10

1

r-07

r-07

y-07

n-07

ul-0

7

g-07

p-07

t-07

v-07

c-07

n-08

b-08

r-08

r-08

y-08

n-08

ul-0

8

g-08

Ma

Ap May Ju

n

Ju Aug

Sep

Oct

Nov

Dec Ja

n

Feb

Ma

Ap Ma y Ju

n

Ju Aug

LESS REPOSSESSIONS FROM MORE RECENT BUSINESSMORE RECENT BUSINESS DECREASING AS

LESS REPOSSESSIONS FROM MORE RECENT BUSINESSMORE RECENT BUSINESS DECREASING ASMORE RECENT BUSINESS DECREASING AS

PERCENTAGE OF REPOSMORE RECENT BUSINESS DECREASING AS

PERCENTAGE OF REPOS

Repossessions WesBank Motor (Excl TFS)% repos performed in the month

% of repos coming out of more recent business is lower than historical averages of 7.25% for 0-6 months and 20.4% for 0-12 months

Decreasing trend from 2006 levels

WHAT NEXT …WHAT NEXT …• Rate decreases of 2-3% expected during 2009 will assist with normalising volumes

from currently very depressed state

• However, the recovery cycle will take time as consumers de-lever to 60-70% debt-to-household income range (unlikely to ever reach 50% again) – don’t expect to see

• Rate decreases of 2-3% expected during 2009 will assist with normalising volumes from currently very depressed state

• However, the recovery cycle will take time as consumers de-lever to 60-70% debt-to-household income range (unlikely to ever reach 50% again) – don’t expect to seehousehold income range (unlikely to ever reach 50% again) don t expect to see 2006 volumes anytime soon

• Selective and gradual improvement in Market Share as competitor credit appetite wanes

household income range (unlikely to ever reach 50% again) don t expect to see 2006 volumes anytime soon

• Selective and gradual improvement in Market Share as competitor credit appetite wanes

18%

Sep-02

• Strong growth cycle therefore likely still a number of years away• Strong growth cycle therefore likely still a number of years away

16%

17%

te

Sep-02

Jun-03 A 08Jun-08

Recovery ?

14%

15%

Prim

e ra

Jun 03

Oct-07Dec-07

Apr-08

13%50% 55% 60% 65% 70% 75% 80%

Debt-to-Household-Income

Sep-03 Aug-07

Th kTh kThankThankYouYouYouYou

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