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Microsoft PowerPoint - UBS Conference v2 3 (FINAL - Ex Notes ...


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  • 1. Focus on investment banking UBS Financial Services Conference Charles Russon CFO, Absa Capital 17 October 2007 This presentation or any of its contents may not be distributed, copied or used in any way without the prior written permission of Absa Bank Limited.
  • 2. South Africa is a growth market for investment banking, supported by strong macroeconomics The South African economy is on a solid growth path This is good news for investment banks in South Africa GDP growth (Q/Q annualised %) Inflation (annualised %) 6 20 5 4 16 3 2 12 % 1 % 8 0 CPI -1 5 year average Primary Secondary 4 -2 CPIX Tertiary GDP -3 0 1985 1989 1993 1997 2001 2005 1985 1988 1991 1994 1997 2000 2003 2006 2
  • 3. … and investment-led growth at the microeconomic level Lower consumption-led growth (high debt levels & interest rates) in the coming quarters is being compensated by investment-led growth Exports likely to remain strong Africa to become a focus for investment in select locations and industries Gross fixed capital formation/GDP 22% GFCF/GDP (%, lhs) 20 %Y/Y grow th (real, rhs) 15 20% 10 18% 5 16% 0 14% -5 12% -10 10% -15 1995 1997 1999 2001 2003 2005 2007 Solid macro and microeconomic environment creates strong demand for investment banking products and services 3
  • 4. Absa Capital’s business model is well- positioned to capture market opportunities Robust and flexible business model with global reach — Driven by front-office and back-office talent incentivised to maximise opportunities across the franchise — Supported by a risk management framework to anticipate, measure and manage risk appropriately (Credit Risk, Market Risk, Operational Risk, Legal, Compliance) Strong local balance sheet coupled with global + knowledge, distribution and technology 4
  • 5. Our performance to date demonstrates the effectiveness of our model in the SA market Absa Capital earnings HY* comparison Fee and margin income: 2005 = 100 1800 1680 350 1600 308 300 1400 1290 250 1200 200 R million 1000 Fee income Index Revenue 165 177 Margin income 800 757 Profit after tax 150 568 (PAT) 159 600 100 100 400 50 200 0 0 HY 06 HY 07 2005 2006 2007F Absa Capital launched in May 2006 Fee income increasing relative to margin income as Strong growth YOY: Revenues 30%, PAT 33% originate-and-distribute model takes hold On track for strong growth for FY 2007 *Six months ended 30 June 5
  • 6. We see a number of bigger opportunities in the market … Debt Capital • 80% corporate debt sourced from banks Debt Capital Markets • Non-government ZAR bond market still new Markets Public • R416 billion dedicated to infrastructure projects to 2010 Public infrastructure • Strong development in power, rail & healthcare sectors infrastructure • Use of derivatives relatively low compared to international Derivatives Derivatives markets – strong growth opportunity • Relatively low debt-to-equity ratio in South African companies Private equity Private equity • Rapid growth of the middle class driving earnings growth Black Economic • R3,35 trillion of BEE equity still to be transferred Black Economic Empowerment Empowerment • Opportunity in re-financing and BEE leveraged buy-outs 6
  • 7. A number of current issues that pose a risk to investment banking performance Turmoil in the off-shore credit markets: — Exposure to sub-prime risk — Reduction in liquidity Higher interest rates — Demand for finance — Impact on funding Increased regulation — Basel II Impact? — Global compliance Increased globalisation — New entrants / competition — Capture of global demand 7
  • 8. The sub-prime crisis may cause a reduction in global growth, but also presents opportunities South Africa has low direct exposure to sub-prime assets — But we are exposed to indirect effects through globalisation Effects of the crisis likely to be positive for banking once the crisis has settled Risk that crisis may spill over and affect real growth in the major economies — Negative implications for South Africa We don’t expect a ‘Northern Rock’ in South Africa, but the crisis has yet to resolve itself 8
  • 9. Higher ZAR interest rates restrict corporate loans, but encourage more creative use of the capital markets Interest rate cycle may have peaked (+350bp since June 2006) — But inflation still a concern, and may force further rate increases South Africa’s growth prospects outweigh interest rate concerns Absa Capital is well-positioned to make the most of high interest rates Short-term rates Long-term rates (inverted yield curve) 11.00 14 SARB repo 2-May-06 13 Prime rate 10.00 12-Oct-07 12 11 9.00 (%) (%) 10 8.00 9 8 7.00 7 6 6.00 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 1 2 3 4 5 7 10 15 20 30 9
  • 10. We see Basel II and globalisation as competitive opportunities for Absa Capital Basel II: Basel II will force banks to be more careful with their capital Lower impact on investment banks that focus on origination and distribution (such as Absa Capital) rather than asset gathering Globalisation Globalisation presents both opportunities and threats to investment banks: OPPORTUNITIES THREATS - Drives demand for financing and risk - Exposure to international sentiment and management solutions volatility - Boosts economic growth - New entrants into the market 10
  • 11. While the risks to investment banking profitability have increased, we maintain a positive outlook on the future Investment banks operate in an environment of risk If the correct controls are put in place to anticipate, measure and mitigate risks … And the business has a diversified strategy of products, services and investments Then investment banks are well-placed to profit in all market conditions Absa Capital, which builds off the Barclays Capital business model and global franchise, is well-placed to grow market share in South Africa 11