Edited Transcript of FSR.J earnings conference call or presentation 10-Mar-20 10:59am GMT

Just a quick high-level look at how the portfolio in FirstRand unpacks. Just on the left-hand side, that revenue split, you can see there that banking, which is probably no surprise, it continues to dominate the revenue mix in FirstRand. And then just in the middle there, the graphic shows that South Africa, from a geographic perspective, is the dominant contributing market. Just on the right side is, of course, the franchise split, but I’m going to cover those in a bit more detail on these next slides.

So a high-level unpack starting again now with our biggest franchise, FNB. We’re now looking at profit before tax. And you can see there, FNB’s earnings up 5%, growing more slowly than in the recent past. And you can see the returns coming in, still at a very healthy — just a touch below 40%. Just in terms of the contributors to that, again, like in the past, a very healthy contribution from our transactional activity. It remains dominant. So when we talk about transactional earnings here in this perspective, we’re talking, obviously, about fee and commission revenue. We’re talking about our transactional lending and our transactional deposits. So transactional lending would include things like overdraft. And of course, it also includes our credit card business. So you can see it continues to dominate, although that growth rate is certainly less than we have come to expect from the business.

I suppose the only other take out on this slide is pleasing to see the diversification strategies of save and invest in insurance, starting to make healthy contributions to the overall mix.

Okay, moving on to RMB. Profit before tax, up 6%. And here is a very good glimpse into the state of the economy. You can see here on the graphic that South African profits over the period from RMB were flat, 0% growth. And all of the growth actually came from the in-country and cross-border activities taking place in the sub-Saharan region. ROE coming in there at a very commendable, 20%.

Just in terms of the unpack, again, if you look at the client-facing franchises, investment banking and advisory, corporate and transactional banking and then markets and structuring, all facing clients and all doing well. You can see the investing business, down 46%, and that’s really reflective of only bringing to book the equity-accounted earnings from the portfolio. But in the period, we saw no private equity realizations.

This is just another sort of geographic unpack of RMB’s results. Again, on the left-hand side there, you can see a strong performance investment banking and from corporate, transactional banking. But markets and structuring in South Africa, found it particularly tough going. I’ll talk about that in a little bit more detail. But on the right-hand side, you can see the performance in the rest of Africa. And again, you can see the significant contribution there from markets and structuring. That’s really off the back of developed market investors seeking to get access to rest of Africa, relatively attractive returns. And so a lot of that flow in execution was done by markets and structuring, the global markets division in RMB. Much of it emanated from Nigeria, and a lot of that was packaged and distributed through the London branch. So certainly, that regional diversification has played well into RMB’s numbers.

Okay. Looking at another business that had a tough environment. WesBank, again, you have profit before tax, up 1%. So here, this is really on the back of lower vehicle sales in retail. And of course, this business has seen a lot of pressure in the commercial and SME sectors as well. Another sort of data point for you to just pick up on is that the vehicle replacement cycle at the moment in South Africa is very long. So we have seen customers delay that kind of trade-in and upgrade of vehicles. And certainly, the car park is starting to age.

The other data point that WesBank has picked up is declining creditworthiness of customers. So their acceptance rate of financing transactions has declined for creditworthiness reasons, and they are also seeing that strain in what they historically would have called their low-risk categories of customers. Again, we’re very pleased with that ROE in a tough market, 18.4%, very commendable.

A quick look at our activities in the U.K. From an overall strategy perspective, U.K. profits during the period fell 8%. So you can see there what we think a solid performance from Aldermore Bank and MotoNovo were really offset by a mark-to-market swing in an economic hedge that is used to hedge the interest rate risk sitting in Aldermore Bank business. That kind of mark-to-market swing was as a result of a lower sovereign yield curve that kept significantly following what was perceived to be a good election outcome and off the back of that, lower perceived risk around Brexit.

Okay. If we have a look at these results relative to our articulated strategy, so I’m not going to spend a lot of time on this strategic framework. You have seen it before. It’s remained consistent with what we’ve shown in the past. So I will just dive into the unpack.

So the first part is probably the biggest contributor of earnings for us is, of course, in South Africa, we’re a dominant banking operation. So the question for us is how do we protect and grow those banking earnings, very challenging. Being a large bank, and there are not many sort of blue pools that we can go and discover in South Africa. So this is a big challenge for us. And so the transact and lend strategies are critical to keep this business growing and intact.

Okay. So we start with, again, coming back to the biggest contributor to our banking earnings, our transactional business. So you can see there, FNB, up 4%. As I said, slower growth than what we’ve seen in the past. This business is all anchored and focused on main-banked customer relationship or, if you like, the core customer base. Very pleasingly for us in tough times that VSI measure we talk about. So that’s just jargon for the number of distinct products per customer, and we’re very pleased that over this period, you can see that, that has edged up to 2.92. And again, we think there is lots of runway for that to grow. So it’s essentially selling more products to your customers.

You’ll also see on the slides — that in the slide here that in difficult times, rewards really matter. And you can see that FNB has maintained the generosity with eBucks. So that generosity level is up 18% over the period. And for the 6 months, the value awarded in rands, ZAR 1.1 billion. And just a point that I have spoken about in the past, that the award to cash in ratio for eBucks is very high relative to other reward programs. So it’s — I think it’s certainly north of 95%. So you can see that these rewards and the value it provides to customers, I think, is a big part of that FNB story.

Again, you can see on the slide some of the propositions for our customers have been improved in terms of fee reductions. I’ll also call out 2 particular products. So we’ve launched a very cheap entry-level consumer transactional bank account called Easy Zero. So we are hoping that, that offering can get scale. It’s extremely well positioned and priced and again, highly, highly competitive.

And then what we’ve also done for that micro business level, that entry level into the business segment, we’ve launched a product called Business Zero, again, a very competitive product, and we’re hoping that, that also scales in time. So I think good for customers. And I think this competitive environment is definitely aiding some of these propositions. The transactional impairments, I’m talking here about overdraft and credit cards, are certainly up over the period. And Harry is going to cover that in his presentation.

Just looking at the term lending in FNB. And here, you can see it’s down 2% over the period. So what are we talking about here in term lending. This would include, for example, things like personal loans. It’s going to include mortgages. It’s going to include our commercial lending in property finance. And the largest component in commercial lending is our agriculture book. So that’s really what we’re talking about, here, down 2%. Again, there are some impairments coming in, in some of the portfolios, and Harry will, again, deal with that in his presentation.

One of the points we make here on the slide is that given the sort of this rapid change in growth and this fluid sort of environment that we’re in, it’s very important for us to remain very agile around scorecard adjustments, making sure that those scorecards get timeously implemented in all the different channels. And then, of course, making sure that our collection practices run flawlessly. And we certainly learned 1 or 2 lessons in that space over this period, and we are going to remedy those. And again, this lending business is focused on core transactional customers.

Okay. Very important for us. And I kind of — this talks about the health of the franchise. We’re pleased to see that we were able to grow customer numbers in FNB over the period. So we’ve seen some attrition in consumer banking. But overall, there’s been growth in both premium and in commercial.

At the bottom of the slide, we just talk about the performance of that e-wallet base, up 16% growth, also an exciting proposition for us for the eWallet holders. Essentially this provides free banking. So you can cash out an eWallet for free at FNB ATM. You can pay from a wallet to our wallet for free. And of course, you can use it at a point of sale. So a great proposition for the wallet holders. Of course, it’s a great value proposition for our customers who would send money to wallets. It’s a much safer way of dealing with cash transactions, and you get that massive convenience. And of course, for the bank, it is good because we would earn NIR off those same fees. And of course, there’s some float that sits in wallet, so a great proposition.

We do believe we have the fastest-growing and healthiest eWallet business since starting our journey in the banking business in South Africa. So I’ve spoken about the top left-hand side. Just on the top right-hand side, just to give you a sense of the volumes here. Over the period, 25 million transactions happened on eWallet. And then just in terms of the value sent in those transactions, over ZAR 15 billion. So the individual sort of send per transaction is now approaching ZAR 600. So you can see that it is becoming certainly more meaningful, and we think this is something that we can continue to scale. The other exciting area for us around these wallets is it gives us essentially a base that we can try and target for upselling into some of those consumer transactional offerings that we have.

Just looking at sort of overall transactional volumes in FNB. And again, here, you can just see some indication of slowdown just at the top left-hand side, you can see overall transactions. So those would be all financial transactions in FNB, up over the period, but certainly at a slower rate of growth.

FNB card, on the other hand, still showing pretty healthy growth, so card swapping by FNB cardholders. And then on the merchant acquiring side, you can see healthy growth in both of those. Interestingly, ATM and device cash volumes, you can see they’re down. So that’s an interesting sort of take-up for the first time. And again, this talks to some of the strategies that we’ve been driving. So overall, there’s been a big initiative to push from cash on to card. So that’s something we’re driving pretty hard. So hopefully, that’s playing into it.

The other thing we’re trying to drive quite hard is cash out at till. So we are seeing a big pickup in that activity. And then I suppose the other thing that we are picking up is we are picking up higher-value transactions at ATMs, just reducing the volumes. So it may be that, that trend continues.

Just having a look. This is an important slide around our customers’ adoption of digital channels. So the left-hand side just shows you the migration of customer adoption for the banking app and for online channels. Again, you can see there’s been a significant shift, a very important for us in terms of building out this contextual platform, sort of data-driven institution that we are charging down. It’s all very well having that as a strategy. But if your customers are not adopting these channels, it’s a problem.

And then just on the right-hand side, that just gives you a sense of the activity through these different channels and the interfaces. I mean, I suppose 2 callouts there: The decline in mobile, period-on-period, is much more reflective of the penetration of smartphones into that base. So smartphones are getting cheaper and cheaper and feature phones are starting to reduce in the population in South Africa, which is — it’s a great thing for us to see. And obviously, with new spectrum coming and hopefully, cheaper data, which should be announced soon, we can see a ramp-up of this activity.

But what’s very exciting for us is the number of app log-ins per month on the FNB banking app. You can see that’s now at 55 million log-ins per month. So we think that is market leading amongst our peer banks, and you can see it continues to grow at a significant rate.

All right. Moving on to RMB’s performance in South Africa. Firstly, the largest contributor to the domestic performance for RMB, investment banking and advisory, you can see there up 14% off an ever-higher base, and that’s something we’ve been calling out for years, but the business continues to deliver. I think what we saw for the first time over this period is very few, attractive lending opportunities for the wholesale bank in South Africa. And in fact, RMB’s term lending book over this period I think, actually, Harry, for the first time, went back for the first time. So we saw a decline in the overall book. And that just gives you a sense of that slowdown in production and take-up of wholesale lending.

Equity capital markets. So things like rights issues, listings. You can understand how that’s come to a grinding halt in South Africa, and often the associated advisory and structuring fees around that and all the knowledge-based fees that has also come off in this period. Again, understandably, interestingly, debt capital markets activities were up less off the back of corporate activity, but that was focused much more around a number of sovereigns, including South African issuance from treasury.

Just a little callout here on climate finance. This is the business that really looks after a lot of our activities in that climate space. So the first thing, as we promised, we’ve given increased climate disclosure in the results booklet that you have. So I think on Page 99, if my memory is correct, you will see some breakdown there of some of our climate exposures.

The other thing is that you will see there that we are trying to strike a better balance between so-called green finance or renewables and then brown finance. What we’ve also done is where we consider new brown — financing transactions in that energy space. There are obviously much more stringent rules and standards that need to be complied with. We have previously published our coal policy. That is on our website. And then in the next couple of months, we will be publishing, again, on the website, our climate finance policy.

Right. Moving on to corporate transactional banking. Again, in South Africa, here, a healthy performance, up 16%, really off the back of better usage of facilities that we’ve granted to our clients. And then, of course, you can see there the acquiring volumes in the large corporate space, again, up a healthy 12%. Again, pleasingly for us for this business, we do come from a position of believing we’ve got market share to gain here. We don’t believe we’re at our fair share of the large corporate transactional market. And you can see here, we were able to grow customer numbers, 7%. Obviously, it’s much more difficult to move these corporates over, and then onboarding them fully takes time. So although we can show some client wins here, we expect the full benefits of this client acquisition to play out in future years.

Just at the bottom left-hand side, you can see float balances up 5%. Again, important for us, and I’ve spoken about the merchant services volumes.

Just having a look at markets and structuring in South Africa. Okay. This has been a hard 6 months for the business. So as of a couple of days ago, the FX volatility was particularly low in South Africa, and that impacted for markets and structuring both volumes and then, of course, margins. So bid offers compressed massively when that volatility is absent. And so I think the business certainly saw much less activity from rates.

Fixed income, again, with very low inflation and seemingly well-anchored clients’ appetite for hedging solutions around inflation really weighing significantly. The other thing that this business has got is there’s quite a heavy platform investment story going on here. So Murex, we’ve spoken about over a number of years, it really ramped up over the period, our Murex costs. And again, we haven’t gone fully live on that. So we are still running legacy systems in parallel. So there’s a little bit of duplication of platform cost going on here. And then there’s also some investment going into the London, Africa corridor around technology and other systems.

All right. Moving on to WesBank. Again, here, you can see from the Moto business in South Africa, up 3% on the period. We think it’s a great result from WesBank Moto. Just on the slide there, you can just see the backdrop that they’ve had to face. So in 2018, vehicle sales in South Africa went back 1%. In 2019, they shrunk by a further 2.8%; and WesBank’s forecast for 2020 is there is a further decline anticipated this year of another 3.5%. WesBank in its forecasting of vehicle sales has been surprisingly accurate with their forecast and predictive models. And so I think there’s a very good chance that, that is kind of what we’re going to experience over this next year.

You can see there also on the slide that this business really benefited from some of the risk cuts that they implemented 18 months ago. So they anticipated a much more difficult market. They responded. And so we’ve seen certainly better collections, performance and a number of other efficiencies.

Just one of the other little callouts, sort of a data point around sort of customer affordability. The current contractual term of vehicle financing at the moment is — I think, it’s the longest that WesBank has experienced. It’s now up to 72 months that people are taking to finance a vehicle. And again, I think that just talks about albeit that interest rates may be perceived to be relatively low, you can see how long people are taking to be able to finance a vehicle. So again, another point there of some strain.

Just having a look at now WesBank corporate, a little piece on top of Moto there. You can see that’s down 11% over the period, a very — a tough environment for them. Two of their growth sectors that they’ve typically done — focused on a lot and seen activity from, transport and mining, I think, have been very muted. And then they’ve seen quite a lot of strength coming in that sort of commercial SME sector. So again, rising impairments. Harry will probably touch on it.

Again, here, you can see on the slide, they’ve been growing their full maintenance leasing business. So what is the strategy there? It is all around how we offer our corporate client solutions around financing of fleets and also being able to provide, if you like, a managed maintenance solution that is packaged with that. So that is a business that has been growing. It’s — the portfolio is up to ZAR 4 billion. So that’s great growth. But of course, as you grow the size of the fleet, of course, you get the consequential increase in depreciation, which we flagged there on the slide.

All right. So that’s our banking business. Those are the strategies we’re following, a little bit of an unpack. Just to look now at some of the adjacencies next to banking. So when we talk about that, we talk about our save and invest, and we talk about insurance. So firstly, looking at, if you like, save and invest and some of the deposit performance from FNB, this is an excellent result, we think, in the period. So you can see there, retail deposits, up 11%. That really unpacks 2% for consumer and 16% for premium. And then you can see commercial deposits up 10%. So this is a great result all around focusing on the liability side of the balance sheet, around product innovation, around coming up with attractive rates that have encouraged this. And then, of course, making these offerings available on the digital channels that we spoke about. So this enablement for customers has been easy. So a really good result.

And you can really see the benefit of this play out in some of the funding slides that you have in your slide deck, because you will see that our reliance on institutional funding, which is, of course, much more expensive for us, actually declined over the period. And the only way we’re able to achieve that through Group Treasury is because we get this kind of performance on deposits. So a great story and well done to FNB.

Right. Looking at FNB’s off-balance sheet activities. So this really — this is a depiction of, if you like, the wealth and investment management assets. And really, what they look for, and you can see the different categories, whether it’s advice administration or actual assets under management. This account base now for FNB’s WIM activities focused on the FNB customers, is now up to 400 — just shy of 430,000 customers. So we think there is lots and lots of runway here. If you think of the size of that FNB base, we think there’s a long way to go. The other exciting thing here is we went live on some of the digital channels. In October, we’ve seen a big take-up of that. We’re seeing a big take-up of the robo-advice tool that we activated also during the period. So we think in an environment where there have been a lot of outflows, this business has done well.

And maybe just a callout here on this slide would be that sort of that bottom segment, the assets under management over the period, up 14%. That we think is a great performance. And as I say, we look forward to a — lots of growth from this business.

If we look there at the associated noninterest revenue that comes from these activities, up 2%. There’s a couple of things in here. One is the big rotation into fixed income. So of those fixed income solutions that we offer, of course, the associated fees are much lower. Of course, Ashburton benefits because they have a number of very strong propositions in that space. So they’ve picked up an associated benefit. And then the trust and estate income, I think that’s sort of very seasonal over a period. And so there’s a long pipeline. We expect that to pick up quite strongly into the second half.

Okay. A quick look at Ashburton Asset Management, a very, very tough space to be in, as certainly over the last couple of days have also shown. So pleasingly for us, they managed to hold their AUM steady over the period. But of course, what you can see there is quite a lot of rotation within asset classes. So a big pickup in fixed income and then some outflows and drawdowns in some of the other asset classes.

Okay. Moving on to one of our bigger growth initiatives, more exciting, great traction: FNB Life. So FNB Life as it is today, is already one of the largest insurers in the consumer segment. So just on the left-hand side, what that shows is in-force annual premium equivalent, so if you like, total business. And I suppose the contribution there from credit life really reflects the historical advances growth on our balance sheet. And then the big contribution there from funeral is again a reflection of the historic intention to build this business in the early days around if you — the so-called cash products, and funeral is a big one of those.

But what we did speak about, as we said, going forward, we wanted the strategy to focus much more on the stand-alone life products, what we call core life and then, of course, the underwritten products. And you can see that playing out now on the right-hand side. So new business annual premium, you can see there the strong growth in both core life and underwritten products. The pleasing thing for us in that underwritten product space is the take-up through digital channels. So that was always one of the questions we had for ourselves. Would we be able to scale that business digitally? Would we be able to come up with propositions and product packaging and structuring that can work well on digital channels? And we see that we can. So of course, one of the good things with that is it dramatically reduces our acquisition costs. And then just on the right-hand side, credit life coming off. I suppose that’s a reflective of the slowdown in advances growth.

Just looking at the total value creation from these strategies. So the value of new business, you can see they’re flat over the period. But again, that mix change that I spoke about is very important for us, and we’re pleased with that outcome. And then you can just see on the right-hand side, the embedded value for the total portfolio, you can see that’s up strongly over the period, 18% to ZAR 5.5 billion. So we’re very pleased, and we expect continued growth to come from FNB Life.

WesBank’s also got some insurance activities under its table. So the first thing there, you can see here, gross written premiums of value-added products in that sort of vehicle space, up 15% over the period. We think it’s a good result. That top little piece, down 1%, that is reflective of credit life so that is, if you like, in retail, Moto. And it’s reflective of a lower number of units financed. So although advances look like they grew, actual number of accounts declined and, obviously, the insurance opportunities attach to units.

And then below that, you can see the performance from MotoVantage, a very strong performance over the period, up 16%, reflective of a little bit of a sales mix that’s happening — sales mix change that’s happening in that business. So they are selling more higher-value products, like service plans. And we expect that trend to continue, and they are seeing less appetite and less sales for the lower-value plans, like shortfall insurance and credit life. So that’s good, and we’re very pleased with that performance from MotoNovo. And then you can just see in terms of channel, point-of-sale and outbound call center remain the dominant channels for distribution.

All right. Having a quick look at the performance of the businesses in the region. You can see on the left-hand side, the performance up strongly, 22%, and then on the right-hand side, you can see that, that is all really being driven by RMB’s activities in the rest of Africa. The point that I would call out there, if you look at all subsidiaries, ROE of 22.8%. That has seen a significant lift from what you would have seen in previous presentations. We would just flag that that’s a point-in-time calculation. We don’t expect it to hold for the full year. So we’ve annualized it for the purpose of this calculation. But certainly, you should expect that to drift down. We think the mature subsidiaries ROE is a lot more stable.

Just having a quick look at FNB Africa. The mature subsidiaries really holding their own, so Namibia, Botswana and Eswatini. I think the macroeconomic environment that they’re facing is very similar to what we’re experiencing here. So difficult, but they’re holding their own. They’re large banks in those markets.

And then the emerging subsidiaries, I’m not going to go into a lot of detail. I think there are a couple of positives, and we’ve seen some improvements in the portfolio. But at the same time, there are still a lot of challenges for us to get to grips with.

Just having a look at RMB Africa. As I say, the performance here is all about markets and structuring. The other activities in RMB declined over the period, but this markets and structuring, a lot of flow activity and execution. Not all of it coming from Nigeria, but certainly, Nigeria being a big contributor to this. We do expect that this pretty robust growth from markets and structuring in the first half is going to taper into the second half. The reason for that is as the business fills up the utilization of limits, you would expect the sort of run rate to slow down. And then the second thing is that we are also starting to take some active steps around derisking for some of the macroeconomic strain that we expect is coming to Nigeria, in particular, off the back of this volatile oil price.

All right. And then moving here quickly on to the U.K. Of course, we’re making some great progress around the integration of the 2 businesses. We’ve spoken about that. There’s one combined strategy that has been launched by the Aldermore Group. So that is being embedded across the combined businesses. And of course, they’re making some very good progress around integrating some of the functional areas. So already, you can see it’s happened with funding. It’s happened with risk, it’s happening with finance. There are obviously other areas that we will continue to make some progress on, but the — certainly, the business is getting on with that, and we expect efficiencies in time to come out of that.

MotoNovo origination. Of course, they’re benefiting now from access to Aldermore retail funding. It’s certainly more secure funding. It’s more sustainable, and it’s more competitive. And the interesting thing for MotoNovo is they’ve found now, with the build-out of this front book, that they’ve been able to get back into segments that — these low-risk segments that they were pretty much uncompetitive in, they’ve been able to go back in there, which is great because we’re starting to add low-risk assets back into our Moto portfolio. And some of the returning segments, which I think often exhibit better risk profiles, they’ve been able to participate in as well. So we’re very pleased with the strategic progress that is happening.

Just having a quick look at Aldermore’s funding stack in the bank. So firstly, cost of funds, up slightly to 1.67%. That’s something that we flagged. We expected that slow drift upwards. Secondly, you can see that retail funding, in particular, has been scaled for Aldermore’s own advances growth over this period but, of course, for the front book of MotoNovo as well. And you can see now on the slide that deposits from retail, business and corporate now exceed GBP 10 billion.

Just having a look at some of the advances. Net lending to customers now exceeds GBP 12 billion. We think there’s good diversification in the book. So retail mortgages — although on this slide, it has a number of components, but retail mortgages are up 6% over the period and now total GBP 7.2 billion. Business finance is up 1%, and that portfolio total is — amounts to GBP 3.5 billion. And then the motor finance front book of MotoNovo, you can see that is already at GBP 1.3 billion.

Customer numbers for the combined — for the new MotoNovo business and Aldermore now exceed 420,000 customers. And then as you can see just on the right-hand side, cost of risk, excluding MotoNovo, very well managed, drifting down to 22 basis points. And including that front book origination strain for MotoNovo, the build-out of the new book, you can see that, that adjusts to 46 basis points. We expect some normalization of that as that book matures. And just to remind everybody, the historic book that MotoNovo sort of ran with was around GBP 3 billion. So they are not yet halfway getting back to the kind of levels that they were at.

On the next sense — the next slide here, what we show is a combined MotoNovo business. So we take the piece that sits in Group Treasury, with the so-called back book. We’ve added it to the front book, so you can get a good strategic snapshot of the performance of the MotoNovo book. So you can see there the benefit of getting access to the retail funding, about 50 basis points. That makes a big difference in terms of MotoNovo’s competitiveness, as I’ve spoken about.

The other pleasing thing to see here in this business is the slowly returning insurance business. So that was running at a pretty healthy rate. It had a significant drop off with the introduction of GDPR in the U.K. and slowly, that business has come back. It’s not at the levels it was, but the trend lines are more positive. Cost of risk for MotoNovo, solid and improving. And then the digital disruptive platform, findandfundmycar.com, it’s getting very good Net Promoter Scores, customer adoption looks good. Dealers like it. And so we are hoping that, that digital strategy can also scale in time.

All right. Having a quick look at our management of financial resources. So you know, we talk about capital liquidity, funding and risk appetite. We would sort of group all of those together, and we will talk about FRM. We have a number of disciplines and practices around that. I’m not going to get into too much detail. I just have one slide on it, and I’m not going to go through all of these line items. But what you’ll see here is a snapshot of the group balance sheet. And also, you’ll see that the trend lines here are positive, and we would expect our initiatives to continue to strengthen. Our balance sheet will remain intact, and we will improve.

All right. Having a quick look at where we are with capital. You can see here, group core equity Tier 1 capital came in at 12.4%. So you can see over the 6-month period some capital accretion. Although there were some optimization initiatives, the bulk of that accretion came from a drop-off in terms of demand for capital. So we end off with that sort of middle pillar, if you like, the regulatory stack at 12.4%.

What we then do on the right-hand side is we reduce the regulatory stack to an economic stack. And what we take out of the regulatory stack are a number of items. So firstly, our foreign currency translation reserve, it’s volatile over the period. We don’t think it represents great capital to support risk-weighted asset growth and so we eliminate it. We also take out the transitional impact for IFRS 9, and we take out any known regulatory changes that are coming at us over the horizon period, and we end up with an economic stack. And you can see we show the surplus on economic capital of ZAR 8 billion.

Just a little callout, it is disclosed in the booklet, but FirstRand Bank core equity Tier 1 came in at 13.7%, so higher than group. Just know that we always favor the regulated entity. It’s the entity that is the deposit-gathering entity. It’s the entity that is externally rated, and it is also the entity that we do our corporate issuances out of. So we will always favor bank capital as opposed to group. And again — but you can see, again, significant capital appreciation — accretion in bank.

Just looking quickly at dividends here. You can see that we remain below — our cover remains below our long-term range of 1.8 to 2.2x. So we kept the dividend cover at pretty much 1.71. And again, it’s reflective of a very low demand for capital. I suppose the only callout here, we would say is if we see sustainable demand coming back for capital, of course, this is something that we would have to revisit or if we saw a significant deterioration in our macroeconomic scenarios from here. Again, that’s probably something the Board would want to consider around future dividend payouts.

Okay, I’m going to hand over to Harry. He’s going to give an unpack of the financial numbers, and then I’ll come back with prospects.

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Hetash Surendrakumar Kellan, FirstRand Limited – CFO, Executive Financial Director & Director [2]

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Thanks. Okay. Good morning, ladies and gentlemen. Alan has covered most of these key metrics across in the presentation, when you look at the franchise build out. Altogether, we would say it’s a solid performance, given where we are in the domestic environment and economic environment. A presentation later will cover most of this in more detail.

What you’ll notice is very pleasing and Alan picked up as well on this slide, 9% increase in net asset value per share. Now that at a high level, does impact overall ROE. So the ROE has decreased 110 basis points period-on-period, about 40 basis points come from higher capital base.

And clearly, the earnings side is 70, mainly through credit impairment increase. And if you do a simple calc, you’ll see it is — on the ROA side, 6 basis points against 12.8 gearing and you can easily get to above 70 basis points.

Now picking up on total revenue. Revenue is up 7%, and we do believe that the group has maintained quality growth on this revenue line. Picking up a little bit more between interest income and NIR, client franchises still account for 97% of our total revenue generation. What you see here is a little sliver in purple. That’s your market activity and investing activity (inaudible), about 3%. Now the group, the balance between NIR and NII is still healthy and being maintained over the period.

We talked about current environment, but that is clearly putting pressure on both the revenue lines, being interest and NIR growth. And our insurance — so insurance business, the investment we are speaking has — is definitely starting to play off, and you can see that Alan covered that a 14% growth period-on-period.

Okay. So moving onto some of the specifics. NII, up a creditable 8%. When you unpick overall NII growth, what you’ll see is lending NII is up 3%. So the interest income and lending, up 3%. When you exclude the Aldermore balance sheet, you will notice that overall advances is largely flat, which means we’re up 3%. Effectively, it’s about margin being up for this period.

Transactional NII, now that reflects the strength that Alan talked about in terms of the transaction offering, both FNB and RMB. And when you include the lending activities and overdraft in credit card and most of the valuable deposit franchise, you get to the transactional income, up 13%. Healthy growth in deposits and then a little dotted box, I’ll cover next in terms of group treasury.

Clearly, with the NAV up, you have benefit of indominant capital. So that’s giving more than ZAR 400 million. And then you have a mid benefit of about ZAR 600 million coming in from interest rate and FX, so foreign exchange management activities in group treasury. And what you also note here is the higher holding cost for higher levels of HQLA, given that we want to maintain buffers on LCR.

Okay. So then we talked about margins. What you see here, overall asset mix. Actually, benefiting in margins together in (inaudible) despite the higher funding costs that we noted even in the prior period. With the inclusion of Aldermore, and as we previously reflected, overall margins do decrease. And that’s because of Aldermore balance sheet is clearly weighted towards secured advances, which will have a lower margin. And this, together with more rate-sensitive deposits, you go — you get overall Aldermore margins decreasing this period. So net-net, about a 6 basis points declined to 464 basis points total group margins.

Okay. Then the deposit franchise, we still maintain the strong trajectory in the deposit franchise growth across all the segments, especially given what you see the flatter deposits in the market. And overall healthy 12% growth in total deposit franchise.

Institutional funding. What you see here is largely flat period-on-period. And again, you see it reflects the success of the growing deposit franchise across the group.

Okay. So then moving on to advances. Total retail advances in the domestic space is up 7%. So what you see there is still the targeted nature of the group’s origination approach across various products and segments. And you will also see, when I cover in the next few slides, is the impact of the risk cutbacks that I mentioned early on, especially in unsecured space.

Residential mortgages still reflect a positive real growth so residential mortgage inflation is about 3.5%, and this is a deliberate customer retention strategy across the FME bank customer base, especially in the premium segment. Aldermore advances, I’ll do cover them a little bit later, but it’s been good growth across both the retail and commercial books. And then Rest of Africa, you’ve got a marginal growth in total portfolio when you convert to ZAR, but you had good growth coming up from where you see the mature subsidiaries, and you have off of a very low base though FNB Ghana coming through.

Right. So I did mention risk cutbacks, and you’ve heard that for a few times this morning, and you can see the impact of that in this slide. And you can see the declining trend in absolute growth over the last 6 months to December.

Having said that, FNB still found some good pockets of growth, especially in the premium segment with good upsell, cross-sell and as well in the premium segment. Half of that growth is actually new to the bank growth, and that’s customer acquisition. The benefit of leveraging FNB’s digital platforms still play out strong into the origination into the market.

Direct access. You can see that despite the increased competition in the market, they have actually fared well, and they continue to focus on the lower risk customers and more so on the repeat business customers across their book.

Okay. So credit card. What you do also see is a declining trend in the absolute growth on credit card business. Now you’ll recall that in toward the end part of last year, we referenced issues around

(inaudible) [Udu] Bank and Udu product sales in the credit card origination cohorts. Now those cohorts have pushed us above our overall credit appetite, and I’ll cover that when we speak at NPL formation and the credit charge.

But clearly, it does benefit the overall growth. Now the group and most of the business actually dynamically manages risk appetite, I mean overall, overall in the credit section as well.

Retail, Other, that’s basically overdrafts. And you can see the growth in customer and being the activation of overdrafts, as well as making sure that we entrench the relationship. That also has been impacted on a consistent basis with the unsecured (inaudible) step backs.

Now on the Wes side, Alan has covered this in quite a lot of detail, especially given the tough environment, and then you can see that playing into muted advances growth onto the Moto side. And you see some good growth coming in with a collaboration still with FNB commercial.

Aldermore. On the Aldermore side, you can see the advances benefiting from a 50 basis points that Alan talked about, so they’ve come back and being more competitive into the market space. And then what you see is that the yellow piece is the new origination since May 1, 2019, and also, you see the runoff of what we call in the back book that sits in treasury.

Right. So then turning to overall Aldermore advances, that’s up 14% when one excludes MotoNovo, given that it’s now base or a very small base in the prior period. This is largely driven after buy-to-let businesses, as you see at the bottom as well as residential mortgages. That’s the owner-occupied mortgages, and that follows a very concerted effort by the business in terms of rebuilding the broker relationships.

Now with the inclusion of MotoNovo, I said with other base in 2018, actually just doubled the growth rate, but you’ll see that impact of MotoNovo play for at least the next financial year, if not a little bit longer than that as the book matures.

Looking at property and commercial advances. You can see the comment that Alan makes across, he’s saying that RMB is actually had a decline in overall corporate advances. Now that’s a combination of one, still a very disciplined approach to origination. And that’s clearly looking to protect the return profile as well as some large repayments, which we did expect towards the latter part of the period.

You still have strong growth in the cross-border book. So in currency terms, that’s dollar terms, that was up 14% year-on-year. And then you pick up on commercial advances. So commercial advances, what you see on the donut is actually still a very well diversified business, and it’s continued to leverage off its customer growth historic as well as in the current period. Now overall commercial advances at 10%, you have to say, is quite impressive given the environment that we operate in. And that’s, as I mentioned, off the customer acquisition in the base.

This slide you’ve seen for a while. This is basically risk rates, the overall RMB advances book. And what you’ll see in the counterparty ratings is very little change since June ’19. And what is pleasing is that only 3% of the book as of December ’19 sits in the elevated risk category, and that’s been largely maintained.

Okay. So now we can move on to impairments. So impairments up. Increased total, 18% for the 6 months to December. Now one of the comments that was made is that the group’s credit performance, and we do believe it’s marginally worse than what we had expected. You have to see in light of the macro environment in terms of the context. And Alan showed the slide up in the beginning, which is — which deteriorated rapidly and far more rapidly than anticipated, particularly in the latter part of 2019.

And the velocity of this deterioration, you will not be able to immediately capture within the origination scorecards and also in terms of collection processes. Now the business is actively actually addressing these issues as we go. And these interventions, unfortunately, are only likely to be having an impact in the next financial year. So you’ll see the roll into June. Historical advances growth as expected, has resulted in new business strength. So that’s in line with expectation.

Now what you show on this slide here is what we term operational NPLs. So we exclude the impact of IFRS 9 as IFRS 9 matures within the business, and that’s effectively excluding technical cures, which is the paying customers as well as the lengthening of the write-off period. And we also, for reference, exclude debt review customers. So what you see here is effectively the comment I made around the macro environment as well as new business strain. So now card advances up 84%, sorry, card NPLs, up 84%, and this is where you see the impact of that cohort I mentioned earlier. Personal loans up and NPLs 35%. And that’s actually more in line with new business strain of historical book growth as well as some of a little impact in terms of the collections that I mentioned earlier on, as well as mentioned by Alan.

Retail overdraws, 26%, is effectively off historical book growth. VAF NPLs, the protective period when Alan mentioned the lengthening of the cycle. That’s effectively a protected period as well in terms of the collection process, as well in terms of trying to get a legal process to be able to touch the vehicle. And then residential mortgages is more of a normalization of the book, together with originations statement you’ll expect of the growth in the last 2 years in particular.

So when you bring in the impact of IFRS 9, you can see it in terms of the blue sliver sitting on unsecured, and that’s effectively growing our total book of 31% on total unsecured. From an operational NPL, in terms of the other portfolios being corporate commercial in the U.K., FNB commercial, NPL increase. Now that’s largely driven of the agri book of what you’d expect given the drought. You won’t see that flow impact into the current charge, largely because these were proactively provided against.

Where the credit charge has increased is more in the overdraft advances sitting on the smaller business segment, and that should expect given where we see on the macro. RMB corporate NPLs, significant increases of specific large counterparties, largely significantly collateralized and/or guaranteed. So you will see the impact on NPLs, but when we get to credit charge, you can see it’s actually a minimal impact on total current impairments for the period. Aldermore NPL increase is largely impacted by its asset finance book, where you’ve got a small number of large counterparties and asset finance moving into default.

So then looking at the coverage across the NPL book. And we believe the coverage is largely maintained. You can see on the dotted box at the bottom, the slight decline is largely of the change in mix. And we think this is prudent given where we are in the cycle in terms of maintaining the overall coverage at each product level. So pick up on some of these, so I’ll pick up on 3 in particular. One, residential mortgages. Now with the inflow of new NPLs, together with the technical cues that I mentioned earlier on, which are paying, the coverage has marginally declined, and that’s similar to what you’ve seen in June. Unsecured coverage for NPLs has largely been maintained and corporate commercial coverage is lower, as I mentioned, for the large RMB advances that are either guaranteed or collateralized.

Okay. So then you go into portfolio provisions. And what you’ll see here is that in terms of Stage 1, largely been maintained, you effectively got a marginal decline of 2 basis points, and that’s basically book mix change. We do see is a substantial increase in Stage 2 coverage. Now that’s effectively as part of IFRS 9, we have had implemented curing rules. And as the IFRS 9 process matures, about 700 million of paying customers that have made 12 consecutive payments have effectively been migrated to Stage 2, but we’ve maintained the coverage level. And then you see that uptick in terms of overall Stage 2 coverage.

Okay. So then to the absolute credit charge. First of all, we want to just talk to, excluding Aldermore, sort of overall charge of 105 basis points is slightly weaker for the reasons I mentioned earlier. So as we’ve been guiding towards the range, but I think at this level is slightly weaker, and that’s the pressure you see on the NPL and the knock-on flow on the credit charge. With the inclusion of Aldermore, the charges at 95 basis points. And given the Aldermore portfolio is largely weighted, as I mentioned, toward secured advances. The Aldermore charge itself at 26 basis points is impacted significantly as Alan showed by the MotoNovo new book for the full 6 months. And that’s our Stage 1 provision. When you exclude that at 22 basis points, marginally below the prior reported period, it actually had benefit in the retail book, and that benefit effectively is taken away by those counterparties we talked about in the asset finance portfolio. Okay. So that’s on credit.

Then we get to noninterest revenue, and given the private equity rebasing in the current base in the prior year, we are actually quite pleased with the overall 5% growth in NIR. And that demonstrates the transactional franchise we’ve spoken about earlier. Now majority of these operational drivers for NIR has been covered across the franchises when Alan covered it earlier. The impact of no material private equity realization, you can see actually at the bottom on investment income, which is down 73%. FNB had another good year with overall NIR, up 7%. I’m going to unpack the fee and commission income of 3% in the next slide. But what you see on this slide is really pleasing and growth, again, as I said, in insurance, 14% as well as overall market activity that Alan covered across SA and more so, Africa.

So when you look at this slide, you’ll see that the green bars is effectively healthy growth in transactional volume. And that’s what’s driving fee and commission income growth. With the continued generosity on the last bar, you can see the 7% increase in overall cost of NIR. The reduction in knowledge-based fees is largely the activity or the lack thereof in the market, especially in the domestic market. And then, Alan covered the $270 million pricing. So during the annual pricing review in July, FNB decreased some of the fee categories as part of an ongoing preemptive strategy to improve customer value propositions.

Okay. So private equity. What you’ll see in the 6 months of December, no to very little prior realizations. Annuity income has actually held up pretty well given the macro environment, and that’s because of the investment cycle. And we’ve invested about ZAR 1.4 billion in the 6 months in the period under review, less than, effectively still shows a healthy unrealized portfolio valuation at ZAR 3.8 billion at December.

Okay. So we’re getting towards the end. We’re looking up at the operating cost, cost up 7%. And I’ll pause a little bit to you and say, so the 7% overall group costs is still trending above inflation. But cost, as you’d expect, given this environment and pressure in revenue is achieving, actually, a lot of focus, and it is marginally down on prior period growth rates, as some of you will recall. If, for example, the 1% reduction in total group’s cost base, that’s about ZAR 0.5 billion that we’ve effectively been able to extract over this period. Now that’s given the focus.

Now this was achieved despite — and you’ll see some of the investments that we got across in the next slide. This is despite the ongoing investments in growth initiatives, systems and platforms, and majority of that is actually when we talk about investment, it is invested through the PNL, i.e., it is expense, not sitting up in the balance sheet. And then the cost of income has — given the revenue growth has been slightly better, has marginally declined to 52.1%. So if we can just sit back across — unpack some of the costs across some of the franchises, starting off with FNB overall, up 7%. And what you’ll see is FNB is sitting where the cost of income ratio is now below 50% for this period. And as I mentioned, this is despite the ongoing investments, and you can see the listing thereof as well as headcount and salary growth above inflation, in particular.

On the RMB side, you can see that impact as well. And we talked about Murex and some of the other platforms and system investments, and that brings the overall cost up at 8%. WesBank, the business as usual cost was about 1%, and with the investment in — for maintenance leases, that takes you to overall 5%. And the business as usual 1%, you can see is a very concerted effort by the business, given the pressures on revenue on cost efficiencies.

Aldermore with MotoNovo knocking the base of December 2018, their cost actually looks significantly up at 44%. As I said, that’s because of no base. When you exclude that, you can see they invested in some of their processes and technology as well for the period.

So to briefly sum up, and I still do think, yes, that given this environment, I see a solid set of results. And I do echo Alan’s view, but going forward, actually, the environment puts a lot of pressure on the business. However, having said that, we do believe we have a strong balance sheet, and we do believe our balance sheet is appropriately struck, given where we are in the cycle, and the group has continued to focus on its cost and credit mitigation as discussed later.

We do believe that actually, the group is in a solid position and a strong position to weather the storm, and we do expect a bumpy ride as we get towards the year-end. And I do believe that some of the strategies that you had Alan speak up, for those are definitely very, very sustainable in the medium to long term. And thank you very much. I’ll hand you over back to Alan.

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Alan Patrick Pullinger, FirstRand Limited – CEO & Executive Director [3]

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Good job. All right. Good job, Mr. Kellan. Thank you. Right. Moving on to prospects. Let’s just start with the U.K. and (inaudible). Actually, before I get going on these prospects, I have to just caveat all of what I’m going to say with COVID-19. Okay, we don’t have any particular insight on it. You’re probably as informed as we are on the effect. But there’s no doubt that I think the economic effect is real, and we are seeing it in our businesses. And so whenever trips are not taken or functions are not attended or things are canceled or supply chains are disrupted, just appreciate that someone is losing money when that happens.

And the consequences of that are going to definitely be felt. And I think it’s come at a particularly bad time for our South African customers and our South African businesses, particularly that sort of SME, small business space and even large corporates. So it is what it is. I’m going to say sort of subject to that because that is pretty fluid, and we’ll have to see how that unpacks.

All right. So the U.K. and again, probably here, heightened COVID-19 angst, if you like. But putting that to aside for the moment, definitely less uncertainty around Brexit. What we’re also seeing is more indications of fiscal support coming into the U.K. that we think that, that’s likely. I think they have the physical space to do it. And I think they’ve been pretty clear about wanting to reflect that U.K. economy.

They’re coming off pretty much a starting point of being at full employment. So unemployment down at sort of 3.8%, and we would expect near-term GDP growth to probably soften a little with COVID-19 issues, maybe down to 1%, but then in the longer-term for the GDP growth rate in the U.K. to get closer to 1.5%. And we think all of that is going to be good for house prices, as unemployment and house prices are important for us to keep a focus on for our business in the U.K. and so — but certainly, we think brighter prospects for the U.K. from a relative perspective for FirstRand shareholders, right?

Then moving on to the Rest of Africa. I think the macros are broadly similar to South Africa. I think certain of those markets, as you see, they may experience some stress. I guess, this recent fall off in oil is going to play itself out. And some of those other markets on the back of falling commodity prices, I think, have already started to feel some macro strength. So I won’t call out any of those countries. But there will be a portfolio story that plays out there into the second half, and it’s likely to be perhaps a little bit more muted than what you’ve seen in the first half results.

And then, of course, now moving on to South Africa. We are certainly seeing a slowdown in our business. So we have got data now for January and February, and we are seeing it pretty much across the Board, from consumer all the way up to corporate, lower corporate activity, lower demand for products, credit worthiness on the decline, some transactional volumes are down. So it’s pretty clear for us.

Just in terms of GDP outlook. I mean, our most recent house view forecast has GDP basically at 0 for 2020. And it may well even drift negative. We think wage growth is going to remain very weak and probably get even weaker than what we’ve seen. And consumer spending, of course, then is going to come off. Business confidence and consumer confidence, both very low.

I think business confidence — the new business confidence indicator is due out, I think, this week sometime. And I suspect that is going to give you another indication of where things lie.

One of our objectives that we set ourselves as a management team is our ability to deliver a real growth in earnings to our shareholders every year. You can see, we were on track for that with this first half performance, but what we are saying, given where we currently believe real GDP and inflation are going to land for the rest of the year. So our current forecast of that we don’t — we are pretty certain we are not going to be able to achieve that objective in the full year up to June.

So we are going to fall short of that objective. What we are saying is we are saying we are — we hope the year-on-year performance, so June ’19 to June ’20, is going to show a positive growth in earnings. So that’s some guidance for you. You can calibrate within that range, but it will be — it will fall short of a real growth in earnings.

Of course, with respect to ROE, we have a slide, I mean, the appendix of that slide book, which talks about the sustainability of our ROE profile. We think many of those drivers remain intact, although they will soften somewhat but we are comfortable to be able to guide that we think our ROE will remain well within that range of 18% to 22%.

So then, ladies and gentlemen, before I take questions, just some thanks — just quickly 3 stakeholders. Firstly, all of our customers. We hope we’re going to look after you, where we have looked after you, and we are going to do our best to look after you in this difficult period we are going into.

Of course, a special call out here to our regulators. It’s at times like this that I think we are going to be grateful that we have a sound and well-regulated banking system. And again, the regulators get huge credit for that. And of course, then, all of our employees. What you’ve seen here today is the results of their efforts, and I thank them for their hard work over the period.

And with that, I will open the team up to questions. We do have the — the franchise CEO is here as well and all of my other colleagues, and so I’m sure we’ll be able to put in a good effort on taking some questions here. Right.

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Questions and Answers

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Unidentified Analyst, [1]

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My name is Clem (inaudible), I’m a private analyst. I get the impression that you’re in the middle of a pretty substantial IT development program. Or you give us some — can you able — can you give us some indication of the amount involved and the time frame to completion?

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Alan Patrick Pullinger, FirstRand Limited – CEO & Executive Director [2]

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Yes. So well, I think there’s 2 — there’s probably 2 things that I could refer to. One is, I think, the well-publicized Murex development that’s happening in the RMB business. Markets and structuring, I think that’s a program that’s probably in its third year now. I think the total size of that investment was probably around ZAR 1.5 billion. So not enormous in the circumstances, but certainly a chunky number. And I think we — as I said, kind of, we well into that. Then I think the other transformation that we’re talking about here is nothing to do with sort of a replacement of core banking systems, nothing of that magnitude. With this journey to digital, sort of a contextual platform involves the transformation of many, many systems, I think it’s a journey that’s going to take us years.

You can see we disclosed our IT and our systems spend in our integrated reporting, and see for the magnitude of that. I don’t think there’s anything specific I’m going to call out. So it’s not a replacement of a core banking system. So it’s pretty much — I’m going to say to you a sort of run rate business as usual. But of course, there’s a lot of focus on digital and platform. Okay. Any other questions? And I think if we can just check some of the — any questions, Sam?

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Unidentified Analyst, [3]

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(inaudible). That’s the first question. Did you hear it, Alan?

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Alan Patrick Pullinger, FirstRand Limited – CEO & Executive Director [4]

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Yes.

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Unidentified Analyst, [5]

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Sorry. And the second is to what do you attribute the 19% higher loyalty program costs?

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Alan Patrick Pullinger, FirstRand Limited – CEO & Executive Director [6]

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So 2 questions there. So the first, with respect to the Discovery Card business, how long do we anticipate continuing to run portions of that book on our system. So our best estimates now are the end of this financial year, so June 2020. I think there is a complex migration taking place. So between the teams on the FirstRand side and the teams on the Discovery side, they are both working very diligently at this.

I suppose one of the complexities that maybe we didn’t fully appreciate that — the 2 parties is that we’re transferring a life book that itself is breathing and growing and changing all the time. So the data and the transfer is complex. We hope that this bin-by-bin migration. So in simple terms, that’s where you can take a, if you like, a batch of cards and transfer batches of cards.

We hope that, that will pick up in the next couple of months. But it’s receiving a lot of attention, and we hope both parties, we can try and get it landed by June. If not, I mean, we will make the plan. So I don’t think it’s anything that be of heightened risk, either for, I think, Discovery and ourselves. I think we will work with them, and we will find a solution to it.

Then the second question was around loyalty. Sam?

I guess, one is — and I guess, I suppose there’s some history around eBucks. So we have firstly, it’s — I think it’s been going 20 years. I’m sort of trying to look for — I think it’s probably 20 years in the making. It’s a very, very well adopted program, particularly by sort of — that once we get sort of into those gold propositions into our premium segments, that sort of that upper consumer and premium very, very well adopted. The second thing is we scaled eBucks now into our commercial business. So it’s gaining great traction.

The other part is, I suppose, a call out around the partners that we have bought on Board, so we will talk about it on the eBucks side. You will be able to see all of our different partners that are part of that program. I think they’ve been well chosen. And so I guess — and then, I guess, it’s astutely shaping that eBucks offering so that it resonates very well with particular value propositions and different products.

So we’ve used it behaviorally to drive customers. To do lots of different initiatives. For example, adoption of digital channels. We would use eBucks to massively incentivize that. And so I suppose all of that migration that you see, the volume and the adoption that you see, that cross-sell ratio that is ticking up. All of that probably drives that spend.

It’s something that we would like to continue with. It’s not something that we want to cut back on, as I say, rewards really matter. And if you can kind of be consistent in that reward space, if you are simple enough, people can understand that they enjoy it, they value it and they cash in those rewards. That’s not something that you want to dial back. Sam, are there — did you have any others? Okay.

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Unidentified Company Representative, [7]

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(inaudible)

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Sam A. Moss, FirstRand Limited – Director of IR [8]

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We have questions on the lines coming from Harry Botha of Avior Capital Markets.

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Harry Botha, Avior Capital Markets (Pty) Ltd. – Banks Analyst [9]

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Alan, Harry and team. Just 2 questions, please. Can you tell us which sectors and regions are you — that you’re growing in the cross-border book for RMB? And then can you give us a sense of the adjustments to your new business volumes and personal loans as you’ve cut back in risk appetite?

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Alan Patrick Pullinger, FirstRand Limited – CEO & Executive Director [10]

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Okay. I think time now for some of the team to answer this. So Mr. Formby, the CEO of RMB. Maybe, James, you want to tackle the first one. And maybe, Jacques, you can deal with the second one. Okay, James?

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James R. Formby, FirstRand Limited – CEO of Rand Merchant Bank [11]

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So just in terms of the cross-border book. Predominantly, it’s been growing in 2 regions, one it would be Nigeria. The other one would be — some of it is in Mozambique. But — I mean in total, the cross-border book hasn’t grown by very much, but those would be the regions that we are seeing most growth in.

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Jacques Celliers, FirstRand Limited – CEO of FNB [12]

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Sorry, on — in the back, it’s on Page 31 in the presentation, there are a big indicator there of the cutbacks at now, it’s really playing out in the personal loan space. Fair to say that I think the business is recalibrating, I guess, not only personal loans, but also in the credit card spaces basis and the overdraft stuff. So there’s a definite, deliberate approach to make sure that we go into this period with a meaningful reduction in this same — in this growth phase, but it’s going to take some time to play out in the credit card space, especially if the book builds up a little bit longer. It takes a bit longer. The personal lines business is very responsive to cutback. But the credit card business takes a little bit longer, but only if it’s all or that way, inclined.

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Alan Patrick Pullinger, FirstRand Limited – CEO & Executive Director [13]

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Good. Certainly, there was, there was a (inaudible). Please get a microphone.

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Unidentified Analyst, [14]

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Thank you, Ian, from (inaudible). You mentioned that looking at GDP growth for this year, it could be 0 or it could be negative. Just to give us an idea of the impact this is likely to have. As the pendulum swings, it will eventually swing positively. That’s why we’re still here. Then to go on from there, what sort of time would be involved, to get it from a stop point into any meaningful positive mode?

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Alan Patrick Pullinger, FirstRand Limited – CEO & Executive Director [15]

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Okay. Ian, good question. Now where is James? James? I’m glad I got you — you attended. Let’s just get a microphone to James. Okay. He’s certainly will be able to speak more — much more knowledge than me. Okay. James?

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James R. Formby, FirstRand Limited – CEO of Rand Merchant Bank [16]

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To understand the question correctly, is the — how long it takes for the — that we see upswing again in GDP growth. The — I mean if we look at our forecast in the way the background assumptions there. I mean, we are — we do expect the economy to be relatively hard hit in the very near-term because of the global developments that we see there. And then if we take into account the government’s efforts to really get the fiscal house in order and the impact of that on wage growth and disposable income in the economy, that’s going to have a more meaningful and a longer-term impact throughout this year, et cetera.

And then when the investment starts — cycle starts to pick up, and we think that will be driven by the renewables, et cetera, in the electricity industry. So more towards early next year and then into later 2021, is when we start to see some of the economic activity really picking up. And that would be on account of investment pick up rather than a meaningful consumption effect.

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Alan Patrick Pullinger, FirstRand Limited – CEO & Executive Director [17]

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It could be a follow-up question. (inaudible).

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Unidentified Analyst, [18]

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If I could just go on from there. So you see the recovery when it comes as being internally fired not from the global environment, but from a (inaudible) to be inspired to commodity price recovery?

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Unidentified Company Representative, [19]

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Yes. So that — I mean, so with the bounce back in the global economy, once the hit from COVID starts to fade, and we assume that will take place. Now based on that, we expect that will take place around the actually already in China and then probably about the third quarter for this year. So that would be driven by the global economy. And then there will be — should be another leg coming through internally from the investment side driven by the energy sector into next year. So there will be 2 drivers. Firstly, global, just the recovery from the COVID hit. And then internally, but muted from the investment side, very specific, driven by the energy sector. That’s the base assumptions behind that forecast.

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Alan Patrick Pullinger, FirstRand Limited – CEO & Executive Director [20]

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Just get a microphone, yes? Just in front.

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Unidentified Analyst, [21]

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Picking up from that point. Your slide on Page 25 on the capital situation. You mentioned in passing that you might, at some stage, look to raise external capital. I don’t know if that — if I read that correctly. And my question is, what sort of time frame would you attach to that?

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Alan Patrick Pullinger, FirstRand Limited – CEO & Executive Director [22]

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Yes. I think on that, it would be optimization of the capital stack as opposed to raising share capital. But where is this — maybe — if we could give a microphone to our Head of Capital (inaudible) and get that. There we go.

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Unidentified Company Representative, [23]

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I think that’s correct, Alan. So we have seen, in terms of the growth that we’ve seen over the last 6 months. And I think more so in the last 3 months of the year, a significant slowdown in terms of the demand for capital coming through on the numbers.

So obviously, we are in this slow growth environment in terms of the macros. We will have to look at what as (inaudible) now mentioned how accelerated that growth will be, given these 2 kickers that we may find.

But I think, definitely, we remain focused on how we balance that stack. We have seen over the last 6 to 12 months a concerted effort to rebalance between some of our Tier 2 and our 81 instruments specifically. And bear in mind, that does have an impact in terms of earnings, given how expensive some of these instruments may be so we continue to look at the whole stack and then just rebalance some of those issues.

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Alan Patrick Pullinger, FirstRand Limited – CEO & Executive Director [24]

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Keep the microphone.

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Unidentified Analyst, [25]

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Sorry. You’ve just reminded me of the reference capital situation. How do you see that in terms of regulatory and where is the reserve bank or treasury in that journey?

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Alan Patrick Pullinger, FirstRand Limited – CEO & Executive Director [26]

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Okay. Yes. (inaudible) maybe follow-up.

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Unidentified Company Representative, [27]

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Yes. We’ll continue with that. So we have seen the paper released in terms of the resolution framework by the South African Reserve Bank. So we obviously have to wait for the promulgation of that goal. And we expect that to take place towards the mid part of this year. So once that bill has been promulgated, you will see the establishment of the resolution regime in South Africa. Once that regime is established, we expect certain standards to then be distributed. And we should see further guidance in terms of treatment and impact of this purchase.

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Unidentified Analyst, [28]

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Sorry, are you able to share some details of the unwinding, whatever you want to call it — purchase?

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Unidentified Company Representative, [29]

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The detail, as we said, that all long that we will distribute detail to the market as it becomes known to us. At this point, the Reserve Bank has not published details in terms of the treatment of these proofs in the resolution regime. As I said, the standards will deal with the exact treatment of those purchase.

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Alan Patrick Pullinger, FirstRand Limited – CEO & Executive Director [30]

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All right. Any more? We have any of those questions.

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Sam A. Moss, FirstRand Limited – Director of IR [31]

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We have no further questions from the lines.

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Alan Patrick Pullinger, FirstRand Limited – CEO & Executive Director [32]

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Okay. Good. All right. Thank you very much, ladies and gentlemen. I think there’s some snacks outside. Thank you very much. Thanks.