steve booysen group chief executive absa group limited · steve booysen group chief executive absa...

14 October 2008

UBS Financial Services Conference

Navigating the downcycleSteve BooysenGroup Chief ExecutiveAbsa Group Limited

2

Global financial landscape facing headwinds

• Loss of confidence in financial systems

• Liquidity and funding risk

• Threat to global growth

• Heightened risk aversion

3

South Africa is fairing better …

• Limited exposure to sub prime crisis

• Strong regulatory framework

• Peak in inflation

• SA was well ahead of the global interest rate hiking cycle

4

…though not without risks

• Rand volatility

• Current account deficit

• Infrastructure capacity constraints

• Political uncertainty

• Consumer remains under pressure

5

Policy rates and higher inflation have hurt the consumer

• A dramatic rise in debt servicing

cost

• Increases in food and energy

prices

• Broad-based inflation eroding

purchasing power

• Household discretionary

spending under pressure

Sources: SARB, Absa Capital

2

3

4

5

6

7

8

9

10

11

2

4

6

8

10

12

14

2003 2004 2005 2006 2007 2008

Real household consumption expenditure (% y/y)Debt servicing cost ( % disposable income)

-10.0

5.0

0.0

5.0

10.0

15.0

-40

-30

-20

-10

0

10

20

30

40

50

2003 2004 2005 2006 2007 2008

-

Total vehicle sales (%y/y)

Retail sales (%y/y, real)

6

Housing market is expected to remain under pressure

“Affordability” will recover only slowly, keeping price growth depressed

• Declining house prices as a result of rising inflation, interest rates and declining real household disposable income growth

• Positive real house price growth expected by 2010

Housing sales back at early 2004 levels, keeping stocks high

-10

-5

0

5

10

15

20

25

30

35

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

y/y

% c

han

ge

Nominal and Real House PricesHouses of 80 - 400m², up to R2,9 million

Nominal HP growth Real HP growth

60

80

100

120

140

160

180

200

2003 2004 2005 2006 2007 2008

Housing sales

(6mths cum,thous)

80

100

120

140

160

180

200

220

1990 1993 1996 1999 2002 2005 2008

0

5

10

15

20

25

30

35

40"Affordability" index (lhs)

Absa HPI (% y/ y)

Favourable affodability helped push

house prices much higher.

7

Lower Disposable Income and Security Values have impacted Impairments

Impairments (Rm) Average prime rate (%)

H1 065 H2 065 H1 07 H2 07 H1 08

594

979

985

1 448

2 178

0

500

1000

1500

2000

2500

5 Not restated for CAF + Africa

Rm

6

8

10

12

14

16

%

8

The outlook for market conditions, however, is improving ..

• Inflation has peaked and should

fall quickly from late 2008

• 300bp in cuts reasonable, given

historic SARB comfort zone

• Lower inflation will bring lower

Prime, but not as low as in the

previous cycle

0

5

10

15

20

25

1998 2000 2002 2004 2006 2008

Prime

9% SARB Repo in line with historic norms

Real PrimeReal Prime average (1995 to date)

2

4

6

8

10

12

14

16

2006 2007 2008 2009 2010

CPIX (%y/y)

9

..but the consumer remains vulnerable

Lag between rates falling and borrowing up-tick is long, but falling

Insolvencies tend to peak

well after rates do

10

12

14

16

18

20

22

24

26

28

2

7

12

17

22

27

32

1990 1994 1998 2002 2006

PSCE

5

6

8

9

11

12

14

15

-50

-30

-10

10

30

50

70

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Total insolvencies (% y/y, lagged 3Q)

Debt serv. cost % disp. Income Prime rate

29

18

13

10

Strategic positioning in the current cycle

Protect the retail business

Cost control

Cost of funding

Growth and diversification

11



12

54%46%

Disciplined management of book quality

• Large secured book

• Average LTV 44%

• 54% book > 24 months (AHL)


Maturity of home loans bookRetail Banking book

Loan-to-Value

<24 months

>24 months

Secured Lending

80%

15%

5%Transactional

2%Unsecured

10%

88%

SecuredLending

5%14%

9%8%

64%

<7 0 % 7 0 - 8 0 % 8 0 - 9 0 % 9 0 - 10 0 % 10 0 %

13

Early move to tighten credit criteria

• 5th iteration of tightening underwriting criteria

• Increased LTV caps, restricting exposure

• Improved risk based pricing

• Move from volume to return on economic capital

• Innovation to limit losses


14

Strengthen collections capability

• Increased collections headcount to 1534 from 800

• 4th collection site in Durban opened in march

• Initiatives driving efficiencies:

– Implementation of a sophisticated SMS tool

– Added Predictive diallers to enhance volume of calls

– Implementation of Trace teams to assist in client contactability

– Implementation of shift work for collectors

– Introduction of Dialler optimisation teams ensuring efficiency at collection

centres

– Expanded our mobile Collector functionality


15

Selective growth in market share

• Largest individual deposit base

• Limited credit card rollout

• Slowdown growth in unsecured lending

– Focus on micro enterprise finance

– Woolworths financial services book


16

Protecting the future revenue stream

• Grow the customer base

• Lengthen advances and deposit portfolio duration

• Grow the retail affluent segment

• Operational excellence

• Full banking proposition and superior service


17


Cost control


18

Limiting cost growth

• Cost pressure ��

– Skills shortage

– General inflation

– Wage expectations

• Mitigating response ��

– Reduction in roll out of new branches

– Mothballing certain internal projects

– Reduction in discretionary spending

– Extracting synergies with Barclays

Cost control

19

Improving efficiency a key focus

Total revenue as a percentage of assets

Cost-to-income ratio

Gap – 2.1

4.6 4.6 4.5 4.54.8

4.4 4.2 4.1 3.9 3.93.6

3.3

4.5

69.467.2

64.762.6 62.9 62.3

60.3 60.057.1 56.6 57.0

53.851.8

49.3

6.7 6.9 7.0 7.2 7.17.7

7.37.0 7.2 6.9 7.1

6.6 6.4

Gap – 3.1

2.9

6.0

Operating expenditure as a percentage of assets

9 Year to 31 December

Driving a declining cost-to-income ratio (%)

Cost control

20082007200620052005200420032002200120001999199819971996

20


Cost control

Cost of funding


21

Effect of global credit crunch impacting funding..

• Higher funding costs due to re-pricing of credit risk

• Challenging market conditions in terms of off-shore funding and

capital issuance

• Limited domestic market appetite for securitised notes, asset

backed commercial paper and other structured notes previously

tapped for funding purposes

• Onerous regulatory standards, compliance and disclosure

requirements may potentially emanate going forward

Cost of funding

22

Limited impact on liquidity

• Exchange controls

• Low reliance on off-shore funding

• Strong retail deposit franchise

– access to stable funds

• Strong underlying fundamentals

– Well capitalised balance sheet,

– Diversified earnings

– prudent liquidity ratios

Cost of funding

23

Strategies to mitigate funding costs

• Increase the contribution of retail and commercial deposits

• Correctly price liquidity into all assets and liabilities

• Grow and diversify the funding base

• Continue to maintain a conservative funding profile

• Minimise off-balance sheet exposure

Cost of funding

24

Challenges for Absa in the current cycle


Cost control

Cost of funding


25

Diversifying the business mix

• Build the leading investment bank

• Accelerate growth in commercial business

• Grow a wealth management capability


TargetGrow wholesale businesses to

50% of Group earnings by 2012

26

Absa Capital growing strongly…

Revenue (Rm)6

1 257

1 653

2 318

Jun 2006 Jun 2007 Jun 2008

Contribution to group earnings (%)

17

83

H1 2007 (100%=R4,3 bn)

79

21

H1 2008(100%=R4,6 bn)*

*excludes once off earnings from VISA IPO

CAGR 36%


27

…without an increase in Risk Weighted Assets

• Strong focus on risk

management

• High quality credit advances

90

100

110

Revenue Growth Relative

to Change in RWA(indexed to 100)

Absa Capital Revenue

Risk Weighted Assets (RWA)

Dec 2007 RWAH2 2007 Revenue

Jun 2008 RWAH1 2008 Revenue

Risk Weighted Assets (RWA)


28

Gaining market recognition

* Largest single-day debt raising exercise in South Africa this year

Largest Transactions in 2008

Firsts in South Africa in 2008

R2.2bn bond

Listed first ever capital-

protected commodity basket

Listed first ever eRAFIExchange Traded Fund

First Shari’ah compliant

Exchange Traded Fund

R6.5bn syndicated loan

R3.5bn debt facility*

Industry Awards

Risk South Africa Rankings

Derivatives Dealer of the Year

2ndOverall

2007

Risk South Africa Rankings

Derivatives Dealer of the Year

2ndOverall

2007

KPMG/SAVCA Venture Capital and Private Equity

Industry Performance Survey

Private Equity - Involved in 5 of the top 10 transactions

Leveraged Finance -Mandated lead arranger for 3

of the top 10

2007

KPMG/SAVCA Venture Capital and Private Equity

Industry Performance Survey

Private Equity - Involved in 5 of the top 10 transactions

Leveraged Finance -Mandated lead arranger for 3

of the top 10

2007

250MW Hydropower Plant16 Year Debt Facility

Uganda

UD867m

Mandated Lead Arranger Hedging Bank

2007

250MW Hydropower Plant16 Year Debt Facility

Uganda

UD867m

Mandated Lead Arranger Hedging Bank

2007

Financial Mail Analyst Rankings 2008

DEALING

2nd Fixed Interest Securities

6thDerivatives

Financial Mail Analyst Rankings 2008

DEALING

2nd Fixed Interest Securities

6thDerivatives

29

Goal: To be the leading investment bank in SA

• Continue to grow the client franchise

• Expand into Sub-Saharan Africa

• Derivatise the client base and develop innovative solutions

• Leverage Group wide cross-sell opportunities

• Leverage synergies with Barclays Capital


30

Commercial banking has the lowest market share in South Africa (pbt)…

Nedbank30%

Standard Bank30%

Firstrand21%

Absa

19%


Source: Absa Corporate and Business Bank

31

..but has experienced one of the fastest growth rates over the past three years

1481

1949

2720

2005 2006 2007

PBT


CAGR = 36%

32

Key driver is product and sector diversification

Changing product composition Composition of the advances book

Growing

Reducing49 44

14

10

23

19

4

12

1015

0

10

20

30

40

50

60

70

80

90

100

Jun-06 Jun-08

CPF

%

• More focus on specialised funding solutions, secondary markets, debtor finance,

commercial asset finance


44%

10%

19%

12%

15%

Term Loans Cheque accounts Other*Specfin

* Other includes ADF, Agri property loans and Foreign currency loans

33

Positioning and potential to deliver future growth

• Deeper customer understanding

• Diversifying the revenue mix

– Products

– Sectors

– Grow corporate franchise

• Cross sell opportunities and new business acquisition

• Leverage off Absa capital

• Expansion in Sub Saharan Africa


34

Conclusion

• Defending a strong retail franchise

• Diversifying the business mix

• Maximising cross sell opportunities between business clusters

• High impact, low risk growth potential

• Not capital constrained

Sustained earnings through the cycle

35

Questions

steve booysen group chief executive absa group limited · steve booysen group chief executive absa...

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