14 October 2008 UBS Financial Services Conference Navigating the downcycle Steve Booysen Group Chief Executive Absa Group Limited
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
12
54%46%
Disciplined management of book quality
• Large secured book
• Average LTV 44%
• 54% book > 24 months (AHL)
Protect the retail business
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
Protect the retail business
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
Protect the retail business
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
Protect the retail business
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
Protect the retail business
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
Protect the retail business
Cost control
Cost of funding
Strategic positioning in the current cycle
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
Protect the retail business
Cost control
Cost of funding
Growth and diversification
25
Diversifying the business mix
• Build the leading investment bank
• Accelerate growth in commercial business
• Grow a wealth management capability
Growth and diversification
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%
Growth and diversification
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)
Growth and diversification
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
Growth and diversification
30
Commercial banking has the lowest market share in South Africa (pbt)…
Nedbank30%
Standard Bank30%
Firstrand21%
Absa
19%
Growth and diversification
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
Growth and diversification
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
Growth and diversification
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
Growth and diversification
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