Download - FirstRand Limited - PSG · • Reported ROE ↓marginally to 23.4% (2016: 24.0%) • Normalised NAV ↑9% to 1942 cents Results are on a normalised basis unless stated otherwise.

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FirstRand Limited3 October 2017

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Disclaimer

The information and content made available through this webinar is provided by PSG as general information about the companies and their products and/or services. PSG does not guarantee the suitability or value of any information or particular investment source. Any information in this webinar is provided "as is" and not intended nor does it constitute financial, tax, legal, investment, or other advice. Nothing contained in this webinar constitutes a solicitation, recommendation, endorsement or offer by PSG. You should consult your financial adviser before relying on any information in this webinar. This webinar may contain views or opinions that are not necessarily those of PSG.

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Contents

1. Recommendation

2. Nature of business

3. Financial review

4. Divisional review

5. Company guidance

6. Portfolio guidance

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Recommendation1

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Recommended exposure up to 3.63%:

• Strong, diversified portfolio of businesses • Good case for cross-selling opportunities in the distribution of FNB• Anticipate the strong momentum in its operations to be maintained• Short-term conditions will be a challenge • Customer acquisitions is robust

- the e-migration has occurred faster than expected

• FirstRand has a good track record of providing innovative digital solutions • Credit costs have deteriorated slightly but are still low

- impairment ratio is still below the group’s through-the-cycle threshold

• Lower interest rate environment will have a negative impact on endowment going forward• Quality premium is reflected in the share price

- trading at a substantial premium to SA banks

• We feel the share is fairly valued at current levels• Attractive historic dividend yield

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Nature of Business2

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Nature of Business

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First National Bank (FNB)• Transactional franchise

• Term Lending

• Save and Invest

• Insurance

• Rest of Africa

Rand Merchant Bank (RMB)• Investment banking and advisory activities

• Corporate and transactional banking

• Marketing and structuring activities

• Investing activities

• Investment management activities

Wesbank• Local VAF

• MotoNovo

• Corporate and commercial

• Personal loans

• Rest of Africa

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Financial Review3

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Financial Review:

• Real growth in top line performance

• NII (Net Interest Income) ↑ 5% to R38.6bn

• Net interest margin came in slightly lower at 5.26% (2016: 5.28%)

- Advances growth decelerated to 5%

- Term lending in WesBank and RMB’s corporate business remained subdued

- NII was slightly offset by the provision for bad debts which ↑ 13% to R8.1bn

- Retail provisions were ↑ on a franchise level

- Corporate provisions ↓

- Overall portfolio provisions of 95 bps are above the credit loss ratio (CLR) of 91 bps (2016: 86 bps).

- CLR remains below the group’s 100 – 110 bps target range

Results are on a normalised basis unless stated otherwise

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Financial Review:

• NIR (Non-Interest Revenue) ↑ 8% to R39.3bn- 7% ↑ in commissions and fees at FNB

- constitutes 78% (2016: 79%) of group operational NIR- supported by volumes in digital and electronic channels as well as growth in the customer base

- despite the negative impact simplification and pricing adjustments taken in the lower-income Commission income and fees

- Realisations in RMB’s private equity (PE) portfolio further aided group NIR- Insurance revenues saw a significant ↑ of 26%

• Operating expenses ticked-up to R43.8bn, an ↑ of 7% • Operating jaws was positive for the period

- Marginally unchanged cost-to-income ratio of 51% (2016: 51.1%)

• Normalised earnings per share was 7% ↑ to 436.4 cents• A gross final dividend of 136 cents was declared, a 15% ↑• Reported ROE ↓ marginally to 23.4% (2016: 24.0%)• Normalised NAV ↑ 9% to 1942 cents


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Divisions4

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FNB (contributed 53% to normalised earnings)

• NII ↑ 9%

- 12% growth to R45.5bn in deposits

- 5% growth to R15.8bn in advances

- cross-selling into Premium retail and Commercial customer bases

- positive endowment effect owing to higher average interest rates

• Credit loss ratio rose to 1.20% (2016: 1.08%)

• NIR ↑ 6%

- retail and commercial segments increasing 6% and 9% respectively

- consumer segment saw a R540m negative impact

• Cost-to-income ratio remained relatively stable at 54%

• Normalised profit before tax rose by 5%

• ROE ↓ of 37.4% from 38.4%Results are on a normalised basis unless stated otherwise

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• Transactional franchise

- Normalised PBT ↑ 8%

- Contributes 65% of FNB’s PBT

- Consumer transactional PBT ↓ 19%

- Premium and Commercial transactional PBT ↑ 35% and 13% respectively

- Division benefited from:

- positive endowment effect

- 10% growth in volumes

- positive customer growth

- Sustained e-migration to cheaper channels- short-term revenue squeeze, shift in branch activity from service to sales


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• Term Lending


- commercial segment benefited from client acquisition and targeted product penetration

- retail segment showed good growth in premium

- impairments remained in line with expectations

• Save and Invest


- product innovation

- client acquisition strategies paying off

- digital channels gaining further traction


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• Insurance


- good traction in funeral policies

- sustained cross-sell opportunities

- Costs increased

- Life embedded value jumped by 48% to R3.5bn

• The rest of Africa

- Normalised PBT ↓ to R880m

- loss from the emerging and start-up business ↑ 58%


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RMB: (Contributed 28% to normalised earnings)

• Normalised PBT ↑ 10% to R9.8bn

- 29% ↑ in pretax profits from the rest of Africa of R1.3bn

- The rest of Africa remains a key focus to RMB’s strategy

• Normalised PBT in South Africa ↑ 8% to R8.5bn

• Overall the credit loss ratio narrowed to 0.20 from 0.27

- NPLs ↓ from 1.35% to 0.62%

• Cost-to-income ratio ↓ to 43.4% from 45.1%

• ROE ↑ to 26.2% (2016: 25.2%)


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• Investment banking and advisory activities

- Normalised PBT ↑ 11% to R3.63bn

- fee income was aided by key lending and underwriting mandates

- good advances growth was offset by continued margin compression

- strong portfolio coverage ratio was sustained

• Corporate and transactional banking


- robust operating jaws

- strong demand from structured and traditional trade products

- global FX was negatively affected by certain regulatory environments

- In the rest of Africa, the liability-raising strategy gained traction


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• Marketing and structuring activities


- improved quality of earnings across asset classes

- balanced performances across fixed income and foreign exchange

- Notable structuring deals were concluded for the period

• Investing activities


- strong annuity earnings and good realisations

- new acquisitions aided towards replenishment of diversified portfolio

- unrealised portfolio value reduced somewhat to R3.7bn (2016: R4.2bn)

• Investment management activities

- Normalised PBT ↓ 50% to R88mResults are on a normalised basis unless stated otherwise

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Wesbank: (Contributed 16% to normalised earnings)

• Normalised PBT ↑ 2% to R5.6bn

- domestic lending businesses

- increased conservatism in origination and provisioning

- 20% average appreciation of the rand against the GBP

- Significant impact on MotoNovo

• NIR ↑ 15%

• Credit loss ratio ↑ to 1.68% from 1.59%

- NPL ratio ↑ to 3.80% from 3.38%

• Cost-to-income ratio as marginally ↑ to 40.2% from 39.1%

• ROE ↓ to 20% from 21.9%


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• Local VAF- Normalised PBT ↑ 13% (6% on an organic basis excluding the MotoVantage acquisition)

- Normalised book growth ↑ 10%

- Profitability in associates saw a significant improvement

- New business production growth ↑ to 9.7% from 5.8%

- Impairments normalised

- Strong cost containment

• MotoNovo- Normalised PBT ↑ 9% in constant currency terms (GBP)

- ZAR based normalised PBT weakened 13%

- Risk appetite tightening impacted origination- GBP advances growth ↑ 23%

- new business production ↑ 12%.

- Impairment charge improved in H2


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• Corporate and commercial - Normalised PBT ↓ 10%

- declining Asset Based Finance book- suppressed dealer funding portfolio

- sustained investment drag in the full maintenance leasing business

• Personal loans- Normalised PBT ↑ 2%

- new business production ↑ 18%

- advances progressing ↑ 14%

- offset by NCAA rate caps

- sustained risk appetite and cost drag from investment in new marketing initiatives weighed

• The rest of Africa- Normalised PBT ↓ 25% to R68m

NOTE: Normalised earnings are given before preference dividends

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Other: (Contributed 2% to normalised earnings)

• Normalised PBT ↑ to R573m (2016: R347m)

NOTE: Normalised earnings are given before preference dividends

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Company Guidance

• South Africa's growth prospects expected to remain weak

- Political and policy uncertainty and ongoing governance issues at State Owned Enterprises

- expected to erode confidence and undermine private sector investment

- knock-on effect on GDP growth

- Top line growth in the group's domestic franchises is expected to be impacted negatively

• Growth rates in Sub-Saharan Africa are expected to show a recovery

• Group aims to achieve an ROE near the upper end of the targeted 18% to 22% range

• Group remains committed to its current investment cycle

- outperformance over the medium to long term

- will be supported by the group's strategy to diversify its financial services offering and build the UK and rest of Africa franchises

• Controlling core costs and driving efficiencies remains a focus for management

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Portfolio Guidance

• Capped SWIX All share weighting of 3.46%. • Neutral guidance • Recommended exposure of up to 3.63%

Value

ConfidenceQuality

Good Neutral Poor FSR