May 2019
CAPITAL AND FUNDING UPDATE
• Frikkie Kleinhans Head: Capital Management
• Amit Mohanlal Head: Funding and Liquidity
Presentation team 2
Financial resource management
3
Disciplined financial resource management supports strategy4
Macro environment
Stress testing
Aspirations/ business
plans
Competitive environment
Regulatory environment
FRM Rating agency target
Risk constraints
Return
RiskGrowth
FRM
* FRM is defined as capital, funding and liquidity, as well as risk appetite.
FirstRand philosophy on capital and funding 5
• Diversify across business segments, markets, currencies, maturities and instrument types
• Flexibility across markets, products and investors
• Focus on alignment of funding strategies to asset growth and composition, incorporating risk-adjusted pricing
• Continued evolution of funding instruments and mix to reduce regulatory volatility and optimise asset/liability matching
• Capital planning performed on a forward-looking basis, not point-in-time
• Targets aligned to end-state minimums, including countercyclical buffer requirements
• Frequent issuer, managing rollover profile
• View Additional Tier 1 (AT1) and Tier 2 as sources of funding, i.e. not used to support economic risk
CAPITAL FUNDING
Capital
6
12.0 13.111.0
0.60.5
1.0
2.23.3
2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
FirstRand FRB TargetCET1 AT1 Tier 2
Ongoing optimisation of the capital stack7
%
14.8
16.9
>14.0
Note: Ratios as at 31 December 2018 including unappropriated profits. FirstRand Bank Limited (FRB) includes foreign branches.
FirstRand favours a ‘multiple point of entry’ strategy8
100%100% 100%
Listed holding company (FirstRand Limited, JSE: FSR)
Other activitiesRest of AfricaSA banking
100%
Investment management
FirstRand Bank Limited (FRB)
FirstRand Investment Holdings (Pty) Ltd
(FRIHL)
FirstRand EMA Holdings (Pty) Ltd
(FREMA)
FirstRand Investment Management Holdings
Limited
Entities
100%
Insurance
FirstRand Insurance Holdings (Pty) Ltd
FirstRand International Limited
(Guernsey) (FRI)
UK banking and hard currency platform
100%
Namibia
Botswana
Aldermore
Enabled by flexible issuance platforms – most suitable entity to be considered on a case-by-case basis
Existing platforms
ADDITIONAL TIER 1 TIER 2
• Focus on AT1 issuance in FY2019
• Positive from a ratings perspective
• US dollar issuance in April 2018
• Dollar capital to support cross-border lending and diversify funding base
• Remaining old-style Tier 2 instruments called in December 2018
• Future issuances to manage rollover risk of Basel III-compliant instruments
• IFC dollar Tier 2 redeemed in April 2019, no further instruments with contractual conversion feature
Optimal level of capital issuance for the bank9
R millionNovember 2018 2 265March 2019 2 477April 2019 223
Planned Tier 2 issuance to coincide with FRB12 redemption
• Basel IV reforms
• Guidance note 6 of 2018 – Proposed implementation dates for specified regulatory reforms
• Draft Financial Sector Laws Amendment Bill published for comment by National Treasury in October 2018
• Proposed amendments to various acts to support and empower the resolution regime
• Insolvency Act, South African Reserve Bank Act, Banks Act, Mutual Banks Act, Competition Act, Financial Markets Act and Insurance Act
• More specifically, new chapter (12A – Resolution of Designated Institutions) builds on the draft resolution framework released to the banking industry in January 2018
• Establishment of the Corporation of Deposit Insurance
• Designed to protect depositors’ funds and enhance financial stability (also covered in chapter 12A)
• Financial conglomerate framework
Regulatory update10
Funding and liquidity
11
Funding spreads remain elevated, with minor curve flattening12
Spreads have drifted lower (± 20 bps over the 36m to 120m) since April 2017,shorter-dated spreads remain high relative to historical levels
Source: Bloomberg, <RMBP3>.
0
50
100
150
200
250FRB floating rate note spreads (offer bps, transaction size <=R100 million)
12m 24m 36m 60m 120m
Maturity profile of capital market instruments13
R1.8 billion maturing in November 2019 – provides issuance flexibility for remainder of the calendar year
R billion
* Includes Tier 2 and AT1 capital instruments.
- 2 4 6 8
10 12 14 16 18 20 22
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2038 2042 2045 2046 2050
Senior Senior inflation-linked Subordinated debt* Credit-linked notes EMTN senior issuance EMTN subordinated debt
Current and savings accounts Call accounts
Customer fixed and notice deposits Institutional funding instruments
Capital market issuance Collateral received
Repo Other
Subordinated debt
The bank’s focus remains on building a diversified funding base
Sources of funding Funding instruments
14
Deposit franchise: 68%
1% 1%6% 6% 7% 8% 7%6% 5% 5% 5% 5%
11% 11% 9% 11% 10%
20% 20% 20% 20% 21%
22% 21% 22% 21% 21%
34% 36% 37% 35% 36%
Dec 16 Jun 17 Dec 17 Jun 18 Dec 18
Other Foreign SMEs Public sectorRetail Corporate Institutional
R857bn R885bn R939bn R974bn R1 028bn
Dec 18
217 207
142 119
196
52
19
239 232
141 128
228
63
26
Retail Commercial Corporate andinvestment
banking
Group Treasurydeposits
Debtsecurities
Otherdeposits
Subordinateddebt
Dec 17 Dec 18
Funding strategy continues to be anchored in the deposit franchise…
Deposit franchise +8% Institutional +14% Other funding Subordinated debt
R billion
15
Seek to protect and grow the deposit franchise across all segments, with increased emphasis on savings and investment products
…enabling robust deposit growth and market performance16
Source: SARB BA900 – South Africa operations only, February 2019.
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
Jun 1
1De
c 11
Jun 1
2De
c 12
Jun 1
3De
c 13
Jun 1
4De
c 14
Jun 1
5De
c 15
Jun 1
6De
c 16
Jun 1
7De
c 17
Jun 1
8De
c 18
Deposit growth vs money supply
FRB Standard Bank ABSA Nedbank M3
0%
5%
10%
15%
20%
25%
30%
35%
Jul11
Jan12
Jul12
Jan13
Jul13
Jan14
Jul14
Jan15
Jul15
Jan16
Jul16
Jan17
Jul17
Jan18
Jul18
Jan19
Market share of retail deposits
FRB Standard Bank ABSANedbank Investec Capitec
• Continued focus on optimisation of maturity and liquidity profile to ensure regulatory compliance and
efficient funding of the business
• Funding levels in the SA market remain elevated
• Areas of focus:
• Senior issuance
• Simple, transparent and comparable securitisations, e.g. Nitro 7
• Institutional funding, e.g. prime-linked notes, fixed deposits, floating-rate notes and negotiable
certificate of deposits
Funding issuance considerations17
Annexures
18
FirstRand Bank’s credit ratings19
SOUTH AFRICA SOVEREIGN RATINGS
FIRSTRAND BANK LIMITED CREDIT RATINGS
FOREIGN CURRENCY LOCAL AND FOREIGN CURRENCY
Long term/outlook
Long term/outlook
Long term national scale
Standalone credit rating
S&P Global BB/Stable BB/Stable zaAA+ bbb-
Moody’s Baa3/Stable Baa3/Stable Aaa.za* baa3* Highest rated in South Africa.
Credit ratings as at 15 May 2019.Sources: S&P Global Ratings and Moody’s Investors Service.
Sovereign rating is a ceiling to standalone credit rating and credit profile
• Legal obligation on the SARB/Resolution Authority (RA) to develop resolution plans for all banks and non-banksystemically important financial institutions (SIFIs)
• Standards and information requirements are being developed• More detailed standards and directives for industry/public comment expected once the Financial Sector Laws
Amendment Bill (Bill) is promulgated, as well as the establishment of the RA
Resolution planning - key elements20
Key elements of resolution planning
Identification of resolution groups and resolution entities Interconnectedness
Critical functions and services (for financial stability) –operational continuity
Liability structure and loss-absorbing capacity per institution – new first loss after capital (FLAC) requirements
Asset structure and valuations (liquidation/resolution values for no creditor worse off in liquidation (NCWOL)) Resolution strategies (MPE/SPE*, open vs closed)
Funding in resolution Cross-border regulation
Detailed and mature recovery plan sets foundation for a resolution plan
* MPE – multiple point of entry, SPE – single point of entry.
Note: the above is dependent on final promulgation of the Bill and still subject to finalisation.
• Bill awaiting promulgation • SARB is working on the completion of a “resolution blueprint” with engagement from international consultants and
likely to cover, amongst others:• More context and detail around the elements included in future resolution standards/directives • Definition of resolution strategies and SARB/RA requirements to create individual resolution strategies• Key criteria to be considered to determine most appropriate strategy
• Multiple vs single point of entry, open vs closed market resolution• FLAC
• Instrument criteria to qualify as FLAC• Resolvability methodology to determine level of FLAC for designated institutions
• Early indications point to a small base minimum requirement• Bank-specific add-on imposed on larger banks based on individual resolvability
• Point of resolution/point of non-viability - amendment suggested to FSR Act• Resolution blueprint expected to be released for public comment in third quarter of 2019 calendar year
• To be followed by a public workshop hosted by RA
Resolution blueprint expected in second half of 201921
Note: the above is dependent on final promulgation of the Bill and still subject to finalisation.
Optimise institutional funding22
29%
30%
29%
27%
26%
27%
27%
29%
27%
28% 31%
30%
29%
19%
17%
13%
12%
12% 11%
12% 13
%
19% 21
% 19%
20%
19%
52%
52%
58%
61%
63%
62%
61% 58% 55% 51% 49%
49%
52%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Feb18
Mar18
Apr18
May18
Jun18
Jul18
Aug18
Sep18
Oct18
Nov18
Dec18
Jan19
Feb19
Institutional funding by term
Source: SARB BA900 – South Africa operations only, February 2019.
Strategy to maintain low market share of institutional funding provides greater flexibility, better risk-adjusted profile and increased borrowing capacity
Short term Medium term Long term
15%
20%
25%
30%
35%
40%
45%
50%
Feb18
Mar18
Apr18
May18
Jun18
Jul18
Aug18
Sep18
Oct18
Nov18
Dec18
Jan19
Feb19
Institutional funding as a % of total funding
FRB Standard Bank ABSANedbank Investec
FirstRand Bank, 37%
LIQUIDITY COVERAGE RATIO (LCR) NET STABLE FUNDING RATIO (NSFR)
• December 2018 actual: 110%
• PA adopted an available stable funding (ASF) factor for financial institution deposits <6 months of 35%, considering regulatory and economic barriers that prevent liquidity from flowing out of the domestic economy
• PA includes the CLF in the NSFR with a 5% required stable funding (RSF) factor
• In addressing the LCR, the bank adopted strategies to improve structural liquidity risk and assist with NSFR compliance
• December 2018 actual: 130%
• LCR regulatory minimum requirement effective 1 January 2019: 100%
• FRB aims to exceed the minimum regulatory requirements incorporating a management bufferfor seasonal volatility
• Guidance Note 4/2018 published
• Industry notification from the SARB’s Prudential Authority (PA) of its intention to phase out the committed liquidity facility (CLF) by 1 December 2021
• PA will, in consultation with banks, investigate possible alternatives to the CLF
FRB on track to comply with 2019 end-state liquidity requirements 23
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Disclaimer24
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