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A Structured Debt Finance                                                                           Initiating Coverage   ...
D                                                                  Global Markets Research



         CONTENTS
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D                                                                                                               Global Mar...
D        •   No basis risk: Borrowers’ JIBAR-linked mortgages reset quarterly, on the same day as the notes,
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D   A     SOUTH AFRICAN HOME LOANS
                                                               Global Markets Research
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D                                                                                                           Global Markets...
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D   Crispin Harrison: B.Com, B.Compt (Hons), ACMA, CA (SA), PGDipM
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D                                                                                                               Global Mar...
D      There was an extended narrowing gap between JIBAR (the rate that banks pay for funding) and Prime
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D     4.1.2 Mitigation 2 – Ability to re-price
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D   Two further areas within the income statement warrant comment: origination costs and securitisation
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D          −         Interest on SPV reserve funds to SAHL. SAHL funds the reserve funds within each
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    5.6...
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D   •          Internet: (originates 1% of loans) Internet applications represent only a small portion of loan
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D     The credit function at SAHL extends to independent audits in a number of areas:
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Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
Structured Debt Research Piece On Sahl
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Structured Debt Research Piece On Sahl

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Structured Debt Research Piece On Sahl

  1. 1. A Structured Debt Finance Initiating Coverage Rand Market 16 November 2004 South African Home Loans – House in order • South African Home Loans (SAHL) has originated residential home SAHL FORECAST PRE-TAX PROFIT loans for almost six years against a rapidly changing interest rate and 600.0 property price landscape. 400.0 • The company has captured approximately 4% of SA’s residential mortgage market with its 58,000 (registered and approved home loans) 200.0 customers with a book value of R17.3bn. Rm 0.0 • In addition, SAHL lays claim to two-thirds of SA’s mortgage (200.0) securitisation market and almost a quarter of SA’s R26.8bn total (400.0) securitisation market, having issued its fourth Residential Mortgage 2005 2006 2007 2008 Backed Security (RMBS), Thekwini 4, earlier this year. Income Expenses Pre-tax profit Investor considerations Source: Standard Bank Group and SAHL • Management change: Simon Stockley, a co-founder and past Chief Executive Officer, elected to leave the group at the end of September MARKET SHARE 2004. His successor, Kevin Penwarden, was appointed Chief Operating Officer in February 2003 and subsequently became 4% Managing Director in June this year. Stockley, meanwhile, will advise 2% 4% the group for the next twelve months – and is restrained from 32% replicating SAHL for three years. The rest of the management team, 18% experienced in the mortgage industry, remains in place. • Financial: Results for the six months ended August 2004 indicate that SAHL is on track to report an operating profit in F2005 (in excess of 15% R20m) and should be cash flow positive by F2006. 25% Absa Standard Bank • Margin squeeze: Although the margin between JIBAR +2.1% (SAHL’s Nedbank Firstrand offer to borrowers) and Prime -1% (banks’ “normal offering” to middle- Investec Other banks SAHL income earners) has narrowed from 105 bps four years ago, SAHL has Source: SAHL and SARB exponentially grown its home loan book. • New products: SAHL recently launched complimentary products NATIONAL HOUSE PRICES (Caps, Quickcash and Insurance) and management anticipates that SAHL will launch a hybrid (fixed/variable) home loan product as well as 36 a credit card within the next six months. It has also entered into 24 discussions with corporates for white-labelling opportunities. • Tight risk criteria: Investors in Thekwini securitisations have no Index 12 recourse to the servicer (SAHL), but security is firmly related to home 0 loan pool performance, which is founded in SAHL-implemented rigid risk criteria. (12) (24) In this research report, we have detailed the Thekwini securitisation structure and provided an overview of SAHL – including details of the 4 9 4 5 0 7 2 -9 -9 -9 -0 -0 l-9 l-0 ov ov ar ar ar company’s loan origination, administrative and collection processes as Ju Ju M M M N N Nominal well as financial information, credit considerations and pool information. A Real (CPI deflated) broad study of the macroeconomy and the residential property market Real (Building cost deflated) concludes the review. Source: Standard Bank Group and Deeds Office Kate Rushton, Henry Flint & Elna Moolman (+27 11) 378-7278 kate.rushton@standardbank.co.za Global Markets Research Important disclaimer – please refer to back page Important disclaimer – please refer to back page
  2. 2. D Global Markets Research CONTENTS 1 INVESTOR CONSIDERATIONS 3 A SOUTH AFRICAN HOME LOANS (PTY) LTD 5 2 COMPANY OVERVIEW 6 3 STRATEGY 10 4 SERVICE AND PRICING 12 5 FINANCIAL INFORMATION 16 6 LOAN ADMINISTRATION, ADMINISTRATION AND COLLECTION 22 B SECURITISATION – THE RMBS 28 7 THE SECURITISATION PROCESS 29 8 POOL INFORMATION 32 9 ISSUE PRICING SPREAD ANALYSIS 35 10 RATINGS AND RATING AGENCY COMMENTS 36 OVERVIEW 1 – THEKWINI 1 38 OVERVIEW 2 – THEKWINI 2 39 OVERVIEW 3 – THEKWINI 3 40 OVERVIEW 4 – THEKWINI 4 41 C THE INDUSTRY AND ECONOMY 42 11 ECONOMIC ENVIRONMENT 43 12 RESIDENTIAL PROPERTY MARKET 46 D CONTACTS AND DISCLAIMER 49 Page 2
  3. 3. D Global Markets Research 1. Investor considerations 1.1 Strengths SAHL • Profitability and small balance sheet exposure: As indicated by management, SAHL should SAHL should report an operating profit in F2005 and be cash flow positive by F2006. Through securitisation, report an SAHL’s exposure is limited to its contribution to each Thekwini’s reserve fund (a total of R77m); operating profit 2005 • Brand awareness: SAHL has built on its “switch and save” brand, which is now becoming well recognised. This strong brand would be difficult (and costly) to duplicate and forms a high barrier to entry; • Operating efficiency: SAHL is smaller than a traditional bank and, through its niche offering, is able to run a tight operation. It has taken up a banking activity, which requires comparatively little infrastructure required for the delivery and distribution of product; • Product diversification: SAHL launched several new complimentary products earlier this year – (Quickcash, Caps and Insurance) and will be launching a further suite of products (hybrid fixed / floating loan, credit card and white-labelling) within the next twelve months; and • Shareholders: Standard Bank, JP Morgan and the IFC are major shareholders and are represented on the board as well as on SAHL’s audit, credit and remuneration committees. Strong performance to The Thekwini pools date on • Credit track record: Since inception, SAHL has written off bad debts of R1.4m, including a one-off Thekwini pools exceptional loan of R950,000. Excluding this one large write-off, SAHL’s bad debt write-offs total R469 000 – less than 0.003% of its current book of R13.8bn (registered). Write-offs within the Thekwinis total R6,800. In addition rehabilitation statistics indicate that SAHL is currently achieving a high success rate (95%) in its rehabilitation process. SAHL does not hold any properties in possession. • Regular audits: Standard Bank conducts monthly audits on registered loans (a random 10% is selected of which 4% is audited). Deloitte and Touche conducts due diligences on the securitisations and audits the financial statements on a bi-annual basis; • Well-seasoned and low PTI: The pool is well seasoned, due to the high proportion of loan switches (75% of loans are switches from other financial institutions) and carries a low Payment-to- Income (PTI) – the weighted average PTI ranges from 14.39% for the Thekwini 1 to 16.20% for the Thekwini 4; • Low LTVs: The weighted average Loans-to-Values (LTVs) for all the Thekwinis to date are less than 62% (based on historical values); and • Geographically diverse: The Thekwini pools are geographically diverse yet concentrated in high loan value areas such as Gauteng and the Western Cape. Noteholders • Trigger mechanisms: Several triggers have been implemented to protect noteholders. The most significant is the arrears trigger whereby, once 0.60% of the principal balance is three months or more in arrears, the trigger takes effect. i.e. cash is “trapped” in the respective Thekwini. The triggers have not been breached by any of the Thekwinis; • Ratings: Rating agencies Moody’s and Fitch rate the Thekwinis investment grade. All of the class A notes carry a Aaa.za rating; and Page 3
  4. 4. D • No basis risk: Borrowers’ JIBAR-linked mortgages reset quarterly, on the same day as the notes, Global Markets Research thereby eliminating basis risk. 1.2 Challenges • Maintaining key staff: Succession planning led to a smooth transition between Stockley and Penwarden. However, due to SAHL being a relatively new originator and a smaller operation in A challenge to comparison to other banks, SAHL remains vulnerable to maintaining key staff. This is partially mitigated by a staff share incentive scheme, where options may be exercised only four years from maintain key the date of offer; staff • Dissipating price competitive advantage: When SAHL was launched to home owners in February 1999, the difference between JIBAR +2.1% (SAHL’s offer to borrowers) and Prime -1% (banks’ “normal offering” to middle-income earners) was 196 bps. A year later the average had fallen to 105 bps and by 2002, the figure declined to 59 bps. The differential average of this “advantage gap” moved to 83 bps in 2003 and the average for the year-to-date (end-September) is just 40 bps suggesting SAHL’s competitive price advantage over banks is narrowing. However, of SAHL’s 47,000 clients, only 451 clients (less than 1%) switched out of SAHL between July and September 2004. And, of the 451 clients, 145 switched for a better rate and 131 for a package offered by a competitor; • Operating under low risk macro considerations: SAHL has operated under a declining interest rate environment and increasing house price market. Standard Bank’s view is that activity in the residential property market is expected to remain buoyant, supported by persistent low interest rates and accelerating economic growth. Should the “property bubble” burst, SAHL could be exposed to potentially higher arrears. However, given SAHL’s tight credit criteria, its exposure is likely to be lower than banks’. • Similar company entering the market: SAHL has enjoyed “exclusivity” in the pure home loan market for some time. Another entrant into the market cannot be ruled out. Page 4
  5. 5. D A SOUTH AFRICAN HOME LOANS Global Markets Research 5 2 COMPANY OVERVIEW 6 2.1 Timeline and rate changes 7 2.2 Management 8 2.3 Shareholders 9 3 STRATEGY 10 4 SERVICE AND PRICING 12 4.1 Pricing 12 4.2 Service 15 5 FINANCIAL INFORMATION 15 5.1 Historical 16 5.2 Interim results 16 5.3 Forecast 18 5.4 Income statement 20 5.5 Balance sheet 20 5.6 Cash flow 21 6 LOAN ADMINISTRATION, ADMINISTRATION AND COLLECTION 22 6.1 Origination process 25 6.2 Administration (collections) and loss control 26 Page 5
  6. 6. D Global Markets Research 2. Company overview SAHL was established in July 1998 and six months later commenced originating mortgage loans. SAHL SAHL originates loans (as detailed in Section 6) for two distinct avenues – the Thekwini securitisation established in programme (approximately 70% of loans originated) and the Blue Banner programme, a Standard Bank 1998 and … funded vehicle (approximately 30% of loans originated). Under the Thekwini programme, loans are housed in a home loan warehouse, Main Street 65 (Pty) Ltd, prior to being securitised. Once the value of loans within the warehouse exceeds a set amount, the loans are transferred to Special Purpose Vehicles (SPVs) – the Thekwinis. The Blue Banner loans, meanwhile, are administered by SAHL but funded on Standard Bank’s balance sheet. SAHL registered its first floating rate loan in May 1999 and issued its first Residential Mortgage Backed Securitisation (RMBS), Thekwini 1, in November 2001. By June this year, it had successfully issued four such instruments and is investigating a fifth during the first six months of next year. (The Thekwini 4 … has captured securitisation process and related noteholder and investor considerations are detailed in Section 7). 4% of SA’s residential In almost six years, the company has captured 4% of SA’s residential mortgage market and now has approximately 58,000 customers (registered and approved) and assets under management (book) of property market R17.3bn. Figure 1 illustrates funds under management of registered loans (about 47,000 loans and a book of R13.8bn). This figure excludes loans that are in the pipeline. FIGURE 1: TOTAL ASSETS UNDER MANAGEMENT FIGURE 2: MARKET SHARE (AS AT END OCTOBER 2004) (AS AT END JULY 2004) 14,000 2% 4% 4% 11,200 32% Rand million 18% 8,400 5,600 2,800 15% 0 25% Apr-99 Aug-00 Dec-01 Apr-03 Aug-04 Absa Standard Bank Nedbank Assets under management Investec Other banks SAHL Source: SAHL Source: SAHL and SARB The initial attraction to potential borrowers, and one of SAHL’s key competitive advantages, is the offer of interest rates linked to JIBAR (2.10% over JIBAR), which equates to a lower interest rate than from traditional home loan lenders (typically Prime -1% for middle-income earners). SAHL’s high service levels have proved the differentiating factor in maintaining, and rapidly growing, its clients base during the recent squeeze between JIBAR and Prime. (Price and service are discussed in detail in Section 4). In addition, SAHL has broadened and complimented its existing offering through new products, such as Insurance, Quickcash and CAP loans. And, another suite of new products will be launched within the next twelve months (as detailed in Section 3). Page 6
  7. 7. D Global Markets Research 2.1 Timeline and rate changes A timeline of key events reflecting corresponding month-end prime rates and SAHL’s offer rate is detailed below. TABLE 1: SAHL TIMELINE SAHL’s rate (JIBAR + Year Month Event Prime rate 2.10%) as at month end 1998 March Concept born by founders including Simon Stockley and Dave Barber July SAHL formalised Jul 24.00% Jul 22.41% August Aug 25.50% Aug 24.68% October Oct 24.50% Oct 21.72% November Nov 23.50% Nov 20.69% December Dec 23.00% Dec 20.36% 1999 January Jan 22.00% Jan 19.16% February SAHL launched to SA home owners Feb 21.00% Feb 18.04% March Mar 20.00% Mar 16.99% April Apr 19.00% Apr 16.23% June Jun 18.00% Jun15.56% July Jul 17.50% Jul 14.19% August Aug 16.50% Aug 14.15% September Sep 15.50% Sep 13.45% 2000 R1.2bn funding from Standard Corporate Merchant bank and JP Morgan January Jan 14.50% Jan 12.25% 2001 Competitors reduce margins to defend market share June Jun 13.75% Jun 11.98% July Jul 13.00% Jul 11.75% September Sep 13.00% Sep 11.12% November Thekwini 1 launched Nov 13.00% Nov 11.26% 2002 SAHL’s rates remain lower than banks’ prime rate January Jan 14.00% Jan 12.31% March Mar 15.00% Mar 13.13% June Jun 16.00% Jun 14.12% September Sep 17.00% Sep 14.91% November Thekwini 2 launched Nov 17.00% Nov 15.58% Co-founder Dave Barber departs, Kevin February 2003 Penwarden appointed COO Feb 17.00% Feb 15.54% June Jun 15.50% Jun 13.66% August Aug 14.50% Aug 12.61% September Sep 13.50% Sep 11.28% October Thekwini 3 launched Oct 12.00% Oct 10.12% December Dec 11.50% Dec 9.83% June Thekwini 4 launched; and Jun 11.50% Jun 10.21% 2004 Kevin Penwarden appointed MD August Aug 11.00% Aug 9.50% Co-founder Simon Stockley resigns, takes Sept 11.00% Sept 9.35% September on advisory role; Kevin Penwarden takes the helm as CEO October Oct 11.00% Oct 9.50% Page 7
  8. 8. D Global Markets Research 2.2 Management The departure of Chief Executive Officer Simon Stockley was planned. This is evident by the Penwarden appointment of his successor Kevin Penwarden as Chief Operating Officer in February 2003 – and as takes the helm Managing Director in June this year. Penwarden has been responsible for the day-to-day running and all operational aspects of SAHL for some time now. Business continuity has been secured through Stockley’s undertaking to take on an advisory role to the board and management over the next twelve months – and he is restrained from creating another SAHL, or similar, in the SA market for the next three years. In a letter to investors, Stockley said: “As an existing or potential investor to the current and future Thekwini issues, there should be no concerns in respect of SA Home Loans’ ability to continue servicing and originating assets in line with the eligibility criteria and transaction documents.” The board consists of five directors – one executive director and four non-executive directors. Another executive director will be appointed shortly, probably internally sourced. The board meets eight times per year and has an independent chairman, Harish Mehta. TABLE 2: BOARD STRUCTURE Executive Appointed Resigned Employer KL Penwarden 14 Feb 2003 SJ Stockley 11 Mar 1998 31 Oct 2004 Non-executive H Mehta 1 Jan 2001 Universal Web Printing Ltd SA Melnick 1 Dec 1998 31 Mar 2003 Peregrine Investments Ltd JJ Coulter 15 Nov 2000 JP Morgan Chase Bank Ltd L Rapp 26 Aug 2002 Standard Bank of SA Ltd CR Tasker 14 Feb2003 Standard Bank of SA Ltd AH Hemphill (Alternate to JJ Coulter) 1 Jan 2001 7 Oct 2003 JP Morgan Chase Bank Ltd BA Smith (Alternate to JJ Coulter) 7 Oct 2003 JP Morgan Chase Bank Ltd Source: SAHL Financial Report 2004 (Adjusted for Stockley’s departure) Harish Mehta Chairman Mehta is the Group Managing Director of Universal Web Printing. His directorship profile extends across nine different organisations including Standard Bank of Southern Africa, Fasic Investment Corporation and Kimberley Clark of SA. He was recently appointed to the board of Spar South Africa. Management is divided into four key areas. A brief curriculum vitae of the head of each area follows: Management • Financial – Crispin Harrison; divided into four • Operational – Rob Poley; key areas • Sales – Terry Rayson; and • IT Systems and Credit – Guy Saville. Kevin Penwarden: B Compt. (Hons); CA (SA) Managing Director and Chief Executive Officer Penwarden, a top-ten chartered account student in SA and ex-senior manager of several financial institutions, joined SA Home Loans in 2003 as an executive director and Chief Operating Officer. Previously, he was Managing Director and senior country officer of the Chase Flemings Southern African operations (stockbroking, asset management and merchant banking). Prior to his appointment as CEO, he was responsible for the day-to-day running and all operational aspects of SA Home Loans. Page 8
  9. 9. D Crispin Harrison: B.Com, B.Compt (Hons), ACMA, CA (SA), PGDipM Global Markets Research General Manager: Finance Harrison spent two years with Natwest Markets (London) followed by two years at Credit Suisse Financial Products (London) in charge of the Equity Derivatives Risk desk. In 1995, Harrison moved to NBS Bank, Management first in the Treasury division and then as Director of the Retail division in charge of Pricing and Product team reflects Development. He is a founding member of SAHL and currently heads up the Finance, Securitisation, experience in Quickcash and the Caps departments. the mortgage Robert Poley: AIB (SA), IMM industry General Manager: Operations Poley joined SAHL as Manager of Client Retention after a 20 year career with NBS, which encompassed various positions including Business Analyst/Project Manager in the IT division and ultimately Strategic Manager responsible for all new developments. Before leaving NBS, he managed the migration of the Mortgage Loan Book to FNB and BoE Private Bank. Poley joined SAHL in August 2002 and was appointed to executive management of SAHL in April this year and currently heads up Legal, Compliance, Securities, Client Services, Customer Courtesy Centre and Loss Control. Terry Rayson: BSc (Social Science, Political Studies) National Sales Manager Rayson worked in advertising for the Daily Telegraph (United Kingdom) before moving to SA in 1974 to join IBM’s sales division. He has held directorships with national and local property companies specialising in the commercial and industrial property environments. Rayson joined SAHL in July 1999 and set up the sales infrastructure. He currently heads a sales force of over 100, comprising nine branches and a head office call centre. Guy Saville: B.Com CA (SA) General Manager: Information Technology After qualifying as a CA, Saville worked in the UK, focusing on the development and implementation of newly emerging IT disciplines and became an International Financial Controller for a worldwide group. He returned to SA and joined NBS Bank, where he became General Manager: IT; led a business re- engineering programme; and became a member of the Mortgage Loans executive team. After the BoE/Nedbank merger, he was involved in setting-up a new mortgage origination company. He joined SAHL in March 2004 and is responsible for SAHL’s IT development and technical implementation. SAHL has 2.3 Shareholders ordinary share capital of SAHL has ordinary share capital of R306m. The only major change to the shareholding structure (Figure R306m 3) since SAHL’s inception occurred in 2003 when Peregrine Holdings sold its shareholding to the International Finance Corporation (IFC). Peregrine had supplied “seed” capital for the start-up of SAHL and no longer deemed its holding as core. None of the shareholders have approached management with the intention of divesting their shareholdings. FIGURE 3: SHAREHOLDING STRUCTURE (as at February 2004) 5% Major 7% shareholders 20% 42% include Standard Bank and JP Morgan 26% Standard Bank Group JP Morgan Ventures Corporation International Finance Corporation SAHL Incentive Trust Other minorities Source: SAHL Annual Financial Statements 2004 Page 9
  10. 10. D Global Markets Research 3. Strategy SAHL’s strategy, and to a certain extent its competitive advantage, lies in its unique characteristics. These include: • SAHL is not a bank; • It specialises in home loans, funded through the securitisation process; • SAHL does not need to subsidise a range of financial products and operates on a low overhead structure without an extensive branch network; • Its lending rate is based on JIBAR (fixed at JIBAR +2.1%), which has been consistently lower than Prime; and • Home-owner insurance installments are charged in advance, alleviating compound interest charges; legal fees are discounted by 50%; SAHL pays no commission to estate agents; and charges a nominal once-off bond preparation fee instead of monthly administration fees. In investigating the group’s ability to successfully compliment its previously “mono-product” offering, we examined SAHL’s three new “products” (Caps, Quickcash and Insurance) which have been introduced over the last twelve months. • Caps: Earlier this year, SAHL introduced cap loans i.e. loans carrying a fixed cap rate set at JIBAR +2.1% plus 1%, 2% or 3%. This cap applies only if interest rates exceed the selected fixed cap rate. Borrowers are offered a two-year contract – with the potential to extend following expiry – and Caps, charged a premium of between R7,000 and R23,000 per R1m depending on the cap selected. This Quickcash and amount is capitalised to the bond and there is therefore no upfront cash outlay. Insurance TABLE 3: CAP RATE SUCCESSES TO DATE compliments Value of loans portfolio Phase Date introduced Rate offered Clients secured secured (Rm) Pilot phase Jan ’04 10.9% & 11.9% 168 4.4 Phase 2 May ’04 11.1% & 12.1% 1,431 315 Phase 3 Aug ’04 11.2%, 12.2% & 13.2% 790 180 Phase 4 Nov ’04 10.5%, 11.5% & 12.5% In process In process Source: SAHL • Quickcash: Borrowers seeking to access their home loan funds prior to property registration are No bad debts able to do so via SAHL’s Quickcash facility. Borrowers are charged an administration fee plus recorded on Prime +2% for the facility. SAHL has already lent R16m to clients with the funding provided by Quickcash SAHL. The average period of the loans equates to 36 days with the longest repayment currently on loans the books at six months. No bad debts have been recorded in this area and Quickcash should add some R3m – R5m p.a. to SAHL’s bottom line by 2007. TABLE 4: QUICKCASH YEAR TO DATE R Income YTD 1,300,663 Expenses YTD 660,005 Profit YTD 640,658 Loan book - count 289 Loan book value 13,946,716 Source: SAHL • Insurance: SAHL now offers insurance to new clients. Selling bond protection to cover pre- registered clients has the twin advantage of also securing SAHL’s risk (e.g. assists in eliminating complications surrounding deceased estate properties). SAHL collects the insurance payments on the policies (underwritten by Regent Life) and passes them directly to Regent Life, who in turn returns commission earned on securing these new policies to SAHL. This insurance offering should add some R7m p.a. to SAHL’s bottom line in commissions within five years (Table 5). Page 10
  11. 11. D Global Markets Research TABLE 5: INSURANCE TO DATE Process Amount Clients contacted 10,531 Policies sold 3,075 Conversion rate 29% Total sum insured R720m Total premiums R7m p.a. Source: SAHL In the next twelve months, SAHL will launch another suite of products: Hybrid loan • Hybrid home loan: SAHL is looking to launch a hybrid fixed/floating rate home loan product next year. The loan will be structured so that a portion of the borrower’s loan is fixed, with the other launching in portion JIBAR-linked. The fixed portion is set at JIBAR +2.1% plus some pre-determined rate, 2005 similar to the CAP offering. • Credit card: SAHL also intends launching a credit card. When customers sign their SAHL loan registration documents, they will receive a credit card (carrying threshold limits commensurate with SAHL’s eligibility credit criteria matrix – detailed in Section 6, Table 13). This provides SAHL with a “bounty” sign-on fee from the appointed bank. • Corporate/Trade union alliances: SAHL has the ability to tailor-make products and create additional distribution channels for its products. It has already entered into agreements with certain SAHL has corporates/trade unions in offering home loans to staff. In one instance SAHL, through negotiations ability to tailor- with the human resources representatives of a particular trade union, agreed to pay the individuals’ make products union membership fees for two years in return for encouraging employees to switch, or take out new home loans with SAHL. • White-labelling opportunity: SAHL has entered into discussions to offer its home loan product under a certain company’s label i.e. similar process to no-name branding in retailers. SAHL originates and services the book and assists in the marketing (on the said company’s stationary). Longer-term, and perhaps more risky, new products could include: • Service support: SAHL has the infrastructure to offer their back office as service support to other home lender operators; • Securitisation: SAHL is considering assisting other financial organisations in securitisation; not as arrangers, but as third party administrators and providing assistance with waterfall payments etc; and • Commercial property loans: SAHL is currently investigating the viability of securitising commercial property loans. Page 11
  12. 12. D Global Markets Research 4. Service and pricing Since the inception of the securitisation program, SAHL has operated under favourable market conditions – house prices have been rising sharply in the face of increased demand on the back of softening interest SAHL offers rate levels. This improves consumers’ debt positions. But what if competition intensifies, or banks enter a borrowers price war? What impact will this have on SAHL’s competitiveness and service offering? JIBAR+2.10% SAHL management believes it offers both a price and service proposition to survive under such market conditions. We discuss both in detail. 4.1 Pricing SAHL’s competitive price advantage lies in its ability to offer middle-income earners competitive mortgage rates at JIBAR +2.10%. These earners are often able to secure bank loans at Prime -1% (Figure 4). We refer to the difference between the two as SAHL’s advantage gap. FIGURE 4: JIBAR AND PRIME 26.0 22.0 18.0 % 14.0 10.0 6.0 Jul-98 Oct-99 Jan-01 Apr-02 Jul-03 Sep-04 Difference JIBAR JIBAR+2.1 Prime - month end between Prime -1% and JIBAR Source: Bloomberg +2.1% has When SAHL was launched to SA homeowners in February 1999, the difference between JIBAR +2.1% narrowed and Prime -1% (the advantage gap) was 196 bps. A year later the average had fallen to 105 bps and by 2002, the figure declined to 59 bps. Though the differential average moved to 83 bps in 2003, the average for the year-to-date (end-September) is just 40 bps. (Figure 5) FIGURE 5: JIBAR +2.10% less PRIME -1% - THE ADVANTAGE GAP 2.8 2.1 1.4 % 0.7 0.0 (0.7) Jul-98 Oct-99 Jan-01 Apr-02 Jul-03 Sep-04 Difference between Prime -1 and JIBAR + 2.1% Source: Bloomberg Page 12
  13. 13. D There was an extended narrowing gap between JIBAR (the rate that banks pay for funding) and Prime Global Markets Research (the rate that banks charge borrowers) from approximately August 2003 to June 2004. (Figure 6.) This narrowing is concerning as this has been one of the key selling points to borrowers. Management contends that banks can’t “break” their lending links from Prime rates and therefore they may have to Unlike SAHL, reduce their average level of discounting to Prime. i.e. by offering new loans closer to Prime rather than banks are Prime -1% or Prime -2%. “unable” to re- FIGURE 6: PRIME less JIBAR price 6.0 5.0 % 4.0 3.0 2.0 Jul-98 Oct-99 Jan-01 Apr-02 Jul-03 Sep-04 Prime - JIBAR Source: Bloomberg We have examined these arguments – that of a deviating JIBAR trend, and banks inability to re-price. Details of clients who have switched from SAHL to other banks in the last three months were also studied. These arguments and mitigations are listed below. JIBAR has deviated from 4.1.1 Mitigation 1 – Trend analysis its long-term SAHL management contends that: “It is unlikely that JIBAR's 20-year trend has fundamentally changed. trend Perhaps there is a little more uncertainty surrounding rates, which is translating into JIBAR deviating briefly from its long-term trend.” We calculated JIBAR’s long-term trend (plotted in red in Figure 7), and established that JIBAR has indeed deviated from its long-term trend from approximately August 2003 to June 2004. Since then, it has moved closer to its trendline, which corresponds to the recent widening between Prime and JIBAR (Figure 6). It also supports the trending in the advantage gap back to 70 bps. FIGURE 7: JIBAR TREND LINE ANALYSIS 16 14 12 % 10 8 6 Jan-99 Feb-00 Mar-01 May-02 Jun-03 Aug-04 Jibar Jibar trend Source: Bloomberg and Standard Bank Group Page 13
  14. 14. D 4.1.2 Mitigation 2 – Ability to re-price Global Markets Research Even if the compression between Prime and JIBAR, as described above, had continued, we believe that SAHL has the SAHL has the ability to successfully re-price its offering to borrowers. When SAHL’s business began, the ability to reprice cost to business equated to 85 – 90 bps and servicing the book, an additional 40 bps. Both of these costs reduced once SAHL reached critical mass earlier this year (the point at which SAHL would be profitable should it cease to originate loans – and hence cease funding originating costs). In addition, SAHL has small, yet growing, income from new products in the form of: • Quickcash (refer to Section 3 - Strategy); • Caps (refer to Section 3 - Strategy); and • Commission on insurance (refer to Section 3 - Strategy) SAHL does not really need to use this ability to re-price right now. A study of new business secured during this “narrowing advantage gap” period shows that SAHL is writing new business (in value terms) some 115% ahead of the same period last year. And, hence, SAHL business proposition includes more than just price, i.e. service. (Section 4.2) 451 clients have 4.1.3 Mitigation 3 – Switch analysis switched out of We acknowledge that SAHL’s competitive price advantage was temporarily squeezed for a while, and the SAHL between company did not elect to re-price. We have, therefore, examined how many clients have switched OUT of July and SAHL into another institution given the narrowing gap between JIBAR +2.10% and Prime -1%. Of SAHL’s September 2004 47,000 clients, only 451 clients (less than 1%) switched between July and September 2004. (Figure 8.) Of the 451 clients, 145 switched for a better rate and 131 for a package offered by a competitor (Figure 9). These figures are still rather small in percentages terms when considering SAHL’s total loan pool. We believe that banks could probably pro-actively target clients they believe could be lost to SAHL (i.e. undertake a mini-price war) for a while, and SAHL could shave some bps off its offering, but the benefit would only (temporarily) lie with the borrower. FIGURE 8: BANKS SWITCHED TO (July to September) FIGURE 9: REASONS FOR SWITCH 19 451 58 155 45 42 1 43 28 14 145 1 89 89 131 1 18 8 3 Building loan (SAHL Unable to accommodate) 2 100% Bond (SAHL unable to accommodate) Absa Nedbank SA Bond Restructions on self-employed Sanlam FNB Investec Unhappy with service RMB OMB Standard Bank Further advance declines Package offered by competitor Perm Trans Randbond Better rate offered Unknown Other Unable to trace Source: SAHL Source: SAHL Page 14
  15. 15. D Global Markets Research 4.2 Service SAHL “prides itself on offering its clients a superior service level and believes that exceptional service is “Superior certainly a differentiating factor that encourages new clients to switch, resulting in SAHL being able to services” retain its clients.” assists in retaining clients To ensure SAHL maintains its high level of service, it undertakes the following: • Character profiling for new staff to ensure they meet strict criteria; • Ongoing in-house training; • Continuous reinforcement of client-centric attitudes; • Promote professional, yet individual communication with clients; • Recognise and incentivise the client services team to ensure a pleasant and fun working environment; • Unique IT system that reinforces first call resolution and call ownership; and • IT systems that record a client’s query history, allowing any agent to resolve further queries. By following its motto of “ecstatic client services”, SAHL maintains that by “nurturing its staff” and recognising that they are highly valued assets to their organisation, it ensures that they “thoroughly enjoy their job”, and “portray this passion” across to its client base. SAHL won the SAHL operates a customer courtesy centre, whose function includes confirming details of loans with 2004 Daily News clients after the granting stage. This assists in: Readers’ choice award for the • Identifying errors/concerns early in the process; best mortgage • Improves the quality of attorney instructions; and lender • Reduces non-take up (NTU) levels. SAHL won the 2004 Daily News Readers’ Choice award for the best mortgage lender. The Reader’s Choice is an annual competition where consumers vote for the business they perceive to be best in their field. The competition was divided into four categories with various sub-divisions. SAHL claimed first prize in its class. Page 15
  16. 16. D Global Markets Research 5. Financial information We have split the financial analysis into three sections, historic, interim results to end August 2004, and forecasts. Detailed financial statements appear at the end of this section. Since inception, 5.1 Historical SAHL recorded SAHL has reported operating losses on its income statement since inception. This reflects the nature, and losses rapid growth, of the business – SAHL pays for origination costs up front and receives annuity income over the life of the loan. A snapshot of historic income to expenses highlights this phenomenon. To obtain a fairer reflection of income versus expenses, we have not included interest received or interest paid in Figure 10. We have also stripped out profit on sale of fixed assets, impairment costs and gains on the revaluation of financial assets. Against this background, the expenses to income ratio has improved from 4.6 times in F2003 to 1.3 times in F2004. We have also plotted the number of loans registered. This gives an indication of the expense-led nature of the business. FIGURE 10: INCOME VS EXPENSES 160 20,000 Loans registered p.a. '000 120 16,000 Rand million 80 12,000 40 8,000 0 4,000 (40) 0 2002 2003 2004 Expenses Income Number of loans registered Pre-tax loss Source: SAHL Financial Statements 2003, 2004; Standard Bank Group Income exceeds 5.2 Latest interims expenses at Latest interim results for the six months end-August 2004 indicate that SAHL is indeed on track to break August interims even in F2005. A condensed interim income statement reveals that, for the first time, income exceeds expenses. (Table 6) TABLE 6: INCOME STATEMENT FOR THE SIX MONTHS ENDED 31 AUGUST 2004 Six months end 31 August 2004 R’000 Income 78,338 Expenses 69,137 Origination 45,996 Support services 6,306 Servicing 6,476 Administration and fixed costs 5,641 Securitisation costs 4,718 Net Interest received 1,428 Net profit before provisions 10,629 Source: SAHL Page 16
  17. 17. D Two further areas within the income statement warrant comment: origination costs and securitisation Global Markets Research Origination and costs. It is these two items that relate to “new growth” costs, and to a certain degree determine capital requirements. securitisation represent new In the six months to August 2004, SAHL approved R6bn worth of loans at a cost of R46m. A brief study of growth costs the origination cost per loan in prior years is detailed in Figure 11. FIGURE 11: ORIGINATION COST TO LOAN INDEX 120.0 Index March 2001 = 100 100.0 80.0 60.0 40.0 20.0 Mar-01 Nov-01 Jul-02 Mar-03 Nov-03 Jul-04 Origination costs to loan index Source: SAHL In contrast, overall securitisation costs as a percentage of expenses is marginally increasing. In 2004, this ratio dipped because of a disproportionate rise in group expenses versus securitisation expenses. This Securitisation was largely due to a sharp increase in loans approved during the year – without a proportionate rise in costs as a securitisation expenses. Management has indicated that the percentage should plateau at 5% – 6% from percentage of 2006 onwards. total expenses to average We have also touched on the main items in a condensed balance sheet (Table 7) and discussed its constituents. 5% –6% TABLE 7: BALANCE SHEET FOR THE SIX MONTHS ENDED 31 AUGUST 2004 Six months end 31 August R’000 Capital Employed 168,741 Total share capital 137,460 Long-term liabilities 31,281 Employment of capital 168,741 Fixed assets 3,598 Investments and loans 104,424 Deferred tax 38,480 Current assets 87,617 Current liabilities (65,379) Source: SAHL Page 17
  18. 18. D Global Markets Research 5.2.1 Notes to the balance sheet • Long-term liabilities − About R17m relates to the loan facility as described under interest expenses below; and − The remainder relates to Quickcash funding. • Investments and loans − Almost R77m relates to start-up loans – loans made to the Thekwinis as subordinated debt; and SAHL amortizes − Loans to the share incentive trust of R27m. the securitisation • Current assets: costs over the − Deposits of approximately R20m; life of the − Deferred securitisation costs of R26m (SAHL amortizes the securitisation costs over the life Thekwini of each transaction); − Quickcash short-term loans of R14m; and − The remainder (R28m) relates to fees due from the SPVs. • Current liabilities: − A bad debt provision of R10m; − A creditors balance of R28m of which R13.4m relates to securitisation fees and costs; and − Shareholder funding of R28m. 5.3 Forecast In the historic and interim results sections, we detailed a broad outline of typical income and expenses SAHL will and the sources of funding thereof. Against this background, we have calculated (through discussions with report operating management) that SAHL will turn profitable in F2005 (probably to the order of R20m) and the company profit in F2005 should become cash flow positive a year later. We have plotted forecast pre-tax profit, expenses and income for 2005, 2006 and 2007 in Figure 12. (SAHL will probably begin paying tax in 2006; however, we have elected to focus purely on the pre-tax line.) Where income is typically sourced from: • The Thekwini securitisations – a servicing fee (1.3%); • Blue Banner – an origination fee (1.2%) and a management fee (0.26%); • Main Street 65 – a management fee (1.2%); • Quickcash – interest from Quickcash product (R1,000 plus Prime +2%); • The Cap product; and • Insurance commission. While expenses include: • Origination costs; • Servicing costs; • Securitisation costs; and • Head office costs, other provisions and sundry costs. And interest (which is included in pre-tax profit) takes two forms: • Interest income − Interest on cash on hand; − Interest on Main Street 65. Collateral of 1% of every loan within Main Street is deposited into a bank account. SAHL earns interest on this amount; and Page 18
  19. 19. D − Interest on SPV reserve funds to SAHL. SAHL funds the reserve funds within each Global Markets Research Thekwini. Each Thekwini, in turn, pays SAHL interest for this funding loan. • Interest expenses − Interest on cash overdraft; − Interest on long-term loan. SAHL received funding from Peregrine. When Peregrine divested, SAHL expunged its loan to Peregrine. SAHL raised “replacement” finance. The amount equates to about R17m and is used as working capital; and − Interest on Quickcash loan facility. FIGURE 12: FORECAST PRE-TAX PROFIT, INCOME AND EXPENSES 600.0 400.0 200.0 Rm 0.0 (200.0) (400.0) 2005 2006 2007 2008 Origination costs Securitisation costs Servicing costs Other costs Thekw ini securitisations Blue Banner Main Street Quickcash Insurance Other income Pre-tax profit Source: SAHL The largest increase in pre-tax profit should be recorded in F2006 – a leap from about R20m to R105m. The bulk of this sharp increase flows from an almost doubling of SPV fees, as annuity fees from all the Thekwinis filter through for a full financial year. Management fee contributions from Blue Banner and Main Street should increase in line with volume growth. Value of These forecasts are based on the following assumptions: approved home loans slowing • Value of approved home loans slowing: TABLE 8: HOME LOAN APPROVAL FORECASTS 2005 2006 2007 2008 Approvals (Rbn) 10.8 12.9 14.8 16.8 % change +19.4 +14.7 +13.5 Budgeting for at Source: SAHL least another Approximately 70% of the book is securitised and the remaining percent recorded under Blue Thekwini issue Banner. i.e. SAHL earns a 1.3% servicing fee on the securitised book and a 1.2% origination fee in 2005 plus 0.26% management fee on the Blue Banner loans. Blue Banner loans are administered by SAHL but funded on Standard Bank’s balance sheet; • Amortizing securitisations over the life of the existing Thekwini; Budgeting for at least one new Thekwini issue per year; • Securitisation costs average 7.5% of total costs (Figure 12); and • Other costs and income receipts rise in proportion to the home loan approvals. Page 19
  20. 20. D Global Markets Research 5.4 Income statement TABLE 9: INCOME STATEMENT YEAR TO FEBRUARY R 2004 2003 2002 Interest income 10,532,895 7,636,802 3,066,846 Interest expense 3,722,121 2,805,192 3,192,140 Net interest income 6,810,774 4,831,610 (125,294) Other income 88,986,167 25,381,122 11,669,087 Fees received 82,539,255 22,025,455 10,438,453 Commission income 6,444,717 3,355,667 1,202,430 Profit on sale of fixed assets 2,195 0 23,787 Dividend income 0 0 4,417 Income from operations 95,796,941 30,212,732 11,543,793 Expenses 123,809,196 64,380,172 55,427,475 Impairment of financial assets 6,175,317 1,758,719 2,069,821 Operating expenses 117,633,879 62,621,453 53,357,654 Net profit/(loss) before taxation (28,012,255) (34,167,440) (43,883,682) Taxation 38,480,235 0 0 Net profit/(loss) after taxation 10,467,980 (34,167,440) (43,883,682) Attributable income 10,467,980 (34,167,440) (43,883,682) Source: SAHL Annual Financial Statements * Includes gain/loss on revaluation of financial assets 5.5 Balance sheet TABLE 10: BALANCE SHEET YEAR TO FEBRUARY R 2004 2003 2002 Current assets 70,659,601 23,756,939 18,816,275 Cash & near cash 21,340,957 13,951,741 11,643,803 Accounts receivables 45,170,312 9,805,198 7,172,472 Loans to customers 4,148,332 0 0 Non-current assets 109,692,057 43,850,921 31,600,455 Deferred taxation 38,480,235 0 0 Financial asset 540,427 0 0 Investments 56,212,486 34,971,611 25,610,920 Deferred expenses 12,132,519 7,484,829 4,897,778 Property, plant and equipment 2,326,390 1,394,481 1,091,757 TOTAL ASSETS 180,351,658 67,607,860 50,416,730 Current liabilities 32,038,899 22,697,529 4,337,585 Financial Liability 5,638,432 0 0 Bank overdraft 0 0 0 Accounts payables 22,296,923 22,697,529 4,337,585 Quick cash funding 4,103,544 0 0 Long-term liabilities 17,865,052 0 18,505,606 Long-term borrowing 17,324,625 0 18,505,606 Derivative financial liability 540,427 0 0 TOTAL LIABILITIES 49,903,951 22,697,529 22,843,191 Shareholders' equity 130,447,707 44,910,331 27,573,539 Share capital 305,556 233,896 169,516 Share premium 235,127,243 161,170,369 109,730,517 Accumulated deficit (104,985,092) (116,493,934) (82,326,494) TOTAL LIAB. & SHAREHOLDERS' EQ. 180,351,658 67,607,860 50,416,730 Source: SAHL Annual Financial Statements Page 20
  21. 21. D Global Markets Research 5.6 Cash flow TABLE 11: CASH FLOW STATEMENT YEAR TO FEBRUARY R 2004 2003 2002 OPERATING PERSPECTIVE Net cash utilised by operating activities (17,898,964) (33,799,368) (36,244,520) Includes: Net loss before tax (28,012,255) (34,167,440) (43,883,682) Interest received (10,532,895) (7,636,802) (3,066,846) Interest paid 3,722,121 2,805,192 3,192,140 Depreciation 985,873 682,198 632,404 Impairment provision 2,898,613 1,758,719 2,069,821 Amortization of deferred expenses 4,948,002 2,971,018 814,279 Payment of deferred expenses (11,000,000) (7,128,517) 0 Bad debts 3,244 0 0 Difference in accrued interest 134 (66,129) 0 Fair value adjustment of financial liability 3,290,759 0 0 Impairment of loans to customers 41,566 0 0 (Profit)/loss on disposal 2,195 0 (23,787) Write-off of start-up loan 1,318,165 0 0 Markdown of Peregrine Investment (14,055) 13,802 0 Operating cash flow before working capital change (25,537,759) (35,936,349) (40,390,965) Working capital change 7,643,185 2,136,981 4,146,445 Increase in debtors (7,116,894) (1,062,278) 2,788,804 Increase in creditors 14,760,079 3,199,259 1,357,641 INVESTMENT PERSPECTIVE Cash flow from investing activities (55,007,838) (12,052,005) (791,510) Includes: Investment in start-up loan (22,058,441) (11,067,083) 0 Increase in loan to incentive trust (26,843,912) 0 0 Increase in loan to customers (4,189,898) 0 0 Purchase of fixed assets (1,924,358) (984,922) (843,355) Proceeds on disposal of fixed assets 8,771 0 51,845 FINANCE PERSPECTIVE Cash flow from financing activities 80,296,018 48,159,311 59,233,249 Includes: Issue of share capital 71,660 64,380 92,781 Quick cash funding 4,103,544 0 0 Increase in share premium 73,956,874 51,439,852 67,322,365 Long-term liability raised/(settled) 17,324,625 (18,505,606) (8,181,897) Short-term loans (settled) raised (15,160,685) 15,160,685 0 INCREASE IN CASH 7,389,216 2,307,938 22,197,219 Cash at beginning of year 13,951,741 11,643,803 (10,553,416) CASH AT YEAR END 21,340,957 13,951,741 11,643,803 Source: SAHL Annual Financial Statements Page 21
  22. 22. D Global Markets Research 6. Loan origination, administration and collection Although investors in SAHL’s securitisations have no recourse to the company, note performance is firmly related to home loan pool performance, in particular loan origination, administration and recovery processes. SAHL has originated more than 22,000 loans this year. (Table 12.) TABLE 12: HISTORY OF MORTGAGE ORIGINATION As at year-end Feb Number of loans Amount Mortgage portfolio 1999 First loan registered in May 1999 2000 1,327 R305,886,021 R295,345,393 2001 2,069 R435,929,027 R663,926,809 2002 4,881 R1,063,879,735 R1,579,925,754 2003 8,769 R2,105,858,903 R3,392,004,600 2004 18,248 R4,793,480,706 R7,629,704,730 2005* 22,850 R8,167,978,819 R13,935,332,163 * Year-to-date (As at October 2004) This business flow stems from three main sources: • National sales centres (Branch silos): (originates 74% of loans) Given the marked increase in Sales team of volumes, the sales force (Figure 13) has expanded ten-fold from nine individuals in 1999 to 90 this 90 people year. During 2004, structural changes within the sales force were implemented, including incorporating a level of branch managers between the national sales manager and each region. The sales team has also been trained – and incentivised – on SAHL’s new product offering. Each consultant has their own target with incentives loaded at the top-end of the targets. Approximately 70% of the national sales centres’ sales originate from switching. i.e. clients switching from other financial institutions to SAHL. FIGURE 13: SAHL’S SALES ORGANOGRAM 18 consultants National Sales Manager man the call centre Telecentre Gauteng Western Cape KZN Port Elizabeth East London Bloemfontein 18 consultants 19 Consultants 16 Consultants 6 Consultants 3 Consultants 4 Consultants Johannesburg Southern Cape Pietermaritzburg 21 Consultants 2 Consultants 1 Consultant Pretoria South Coast 20 Consultants 2 Consultants Source: SAHL • Call centre (telecentre): (originates 25% of loans) Eighteen consultants man the Durban-based telecentre and sales originate largely from in-bound advertising. i.e. clients would be responding to print, radio, and more recently, television advertising. SAHL has recently shifted its advertising spend to television and other high-cost to lead media. Page 22
  23. 23. D • Internet: (originates 1% of loans) Internet applications represent only a small portion of loan Global Markets Research applications. The contribution to sales volumes by region almost mirrors the dispersal of sales individuals (Figure 14). Contribution to sales mirrors FIGURE 14: 2004 CONTRIBUTION TO SALES VOLUMES BY REGION (%) sales team locations 20% 26% 3% 16% 4% 15% 16% Johannesburg Pretoria Cape Tow n Durban Port Elizabeth East London/Bloem Telecentre Strict eligibility criteria Source: SAHL Each loan is required to meet SAHL’s eligibility criteria before entering the loan origination process as set out in Table 13. This process is undertaken by the credit department. TABLE 13: SAHL’S LOAN ELIGIBILITY CRITERIA Criteria Margin-related Loan to Value (LTV) On LTV <80% 2.10% above JIBAR (where JIBAR is converted to a monthly rate and rounded up to the nearest 0.1%) On LTV 80% - 90% 2.75% above JIBAR (currently housed in Blue Banner) On LTV 90% - 95% 3.10% above JIBAR (currently housed in Blue Banner) On LTV 95% - 100% 3.75% above JIBAR (housed in Blue Banner) Applicant Age 21 years to 65 years Type Individual, company, close corporation or trust Payment-to-Income (PTI) Less than 30% Loan Maximum amount R2,500,000 Minimum amount R100,000 (R75,000 if granted in terms of approved employee benefit scheme) Maximum term 20 years Additional feature No prepayment or redraw penalties Additional feature Ability to redraw prepaid capital Property Location South African home and mostly owner-occupied Homeowners’ insurance Homeowners insurance required to be taken out and maintained Security Guarantee, indemnity and indemnity bond Source: SAHL Page 23
  24. 24. D The credit function at SAHL extends to independent audits in a number of areas: Global Markets Research • Standard Bank undertakes monthly independent sample audits – detailed checks on underwriting and security documentation; • Deloitte and Touche conducts an external audit on SAHL’s financial results as well as a due diligence process on the securitisation transactions ensuring that with a 99% confidence level errors are not greater than 3%; and • Each securitisation is assigned an independent rating by Moody’s and Fitch. Fitch and Moody’s subsequently provide quarterly performance reviews. Page 24

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