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• Recent history• Simple down cycle model
Predictability is vital• Predictability is vital• The shock• Why the current cycle is different• Management actions• Where are we goinge e a e e go g
• Recent history• Simple down cycle model
Predictability is vital• Predictability is vital• The shock• Why the current cycle is different• Management actions• Where are we goinge e a e e go g
• Recent history• Simple down cycle model
Predictability is vital• Predictability is vital• The shock• Why the current cycle is different• Management actions• Where are we goinge e a e e go g
THIS IS WHAT HAPPENED IN THE LAST 6 YEARS…THIS IS WHAT HAPPENED IN THE LAST 6 YEARS…
18%
Sep-02
16%
17%Sep 02
Jun-03Jun-08
Recovery ?3
14%
15%
me
rate
Oct-07Dec-07
Apr-08
Crunch2
12%
13%
Prim Sep-03
Dec-06 Jun-07
Aug-07
Growth1
11%
12% Oct-03Dec-03
Aug-04 Apr-05 Jun-06
Aug-06Oct-06
10%50% 55% 60% 65% 70% 75% 80%
Debt-to-Household-Income
THE GROWTH PHASE WAS EXCEPTIONALLY GOOD –THE LARGEST IN SA HISTORY SINCE WWII
THE GROWTH PHASE WAS EXCEPTIONALLY GOOD –THE LARGEST IN SA HISTORY SINCE WWII
Passenger and Commercial Vehicles sales Units per quarterPassenger and Commercial Vehicles sales Units per quarter
More than200,000
More than doubling of
vehicles sales in only
3150,000
3 years
100,000
50 000Flat vehicle unit sales
50,000
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
GROWTH WAS ALSO REFLECTED IN ASSET PRICES, CREATING A ‘WEALTH EFFECT’
GROWTH WAS ALSO REFLECTED IN ASSET PRICES, CREATING A ‘WEALTH EFFECT’
Normalised house price Real house price, 1990 = 100%Normalised house price Real house price, 1990 = 100%
250%
Doubling of real house Similarly JSE
200% prices in same period
Similarly, JSE index
quadrupled from 03 to 07
150%
100%
Flat real house prices50%
0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
WESBANK BENEFITTED FROM THE HUGE GROWTH …WESBANK BENEFITTED FROM THE HUGE GROWTH …Annual WesBank New Business production RbAnnual WesBank New Business production RbAnnual WesBank New Business production RbAnnual WesBank New Business production Rb
5160 Growth funded by
increase in household
41
51
40
50increase in household debt from 53% to 78%
of income
20 22
2930
10 1317
10
20
01999 2000 2001 2002 2003 2004 2005 2006
• Recent history• Simple down cycle model
Predictability is vital• Predictability is vital• The shock• Why the current cycle is different• Management actions• Where are we goinge e a e e go g
PREDICTABILITY IS VITAL …PREDICTABILITY IS VITAL …
“The US and world economies may
“ We believe a super cycle isy
have entered a new era of low interest rates“
super cycle is underway, driven
by materials’ intensive
i th
Alan Heap
economic growth in China”
Rich Miller (BusinessWeek Washington) 2005
Alan Heap,(citigroup) 2005
(Unknown) “This is a(Unknown)
“Never before have l
This is a commodity super cycle, and it will be the biggest
so many people improved their
living standard by such a margin”
commodity super cycle in history to
date.”such a margin
James Finch 2006
• Recent history• Simple down cycle model
Predictability is vital• Predictability is vital• The shock• Why the current cycle is different• Management actions• Where are we goinge e a e e go g
THE SHOCKTHE SHOCK
“Oil will breach $100 a b l” (A j M ti 2007)
“ CPIX expected to peak at 12% in the thirdbarrel” (Arjun Murti - 2007)
“Oil prices are likely to rise to between $150 to $200 in the next six to 24 months”
at 12% in the third quarter of 2008 and
only ease back within the target band by the the next six to 24 months
(Arjun Murti – 2008)
SARB 2008
third quarter of 2010”
FEG Consulting
Goldman Sachs
SARB 2008 G Co su t g2008
Trevor Manuel 2007
“The global food crisis is now common knowledge. Since
the start of 2006 the average“Financial crises in developed
countries’ markets, global i b l hi h f d d il the start of 2006, the average
world price for rice has risen by 217%, wheat by 136%,
maize by 125% and soybeans
imbalances, high food and oil prices internationally and
slowing growth in the United States and other developed countries ‘cloud the sky’”
Source: WesBank
by 107%”y
RESULTING IN MASSIVE INCREASE IN DEFAULT RATES UP TO THE PEAK OF THE CRUNCH …
RESULTING IN MASSIVE INCREASE IN DEFAULT RATES UP TO THE PEAK OF THE CRUNCH …
Probability of Default per Decision Bucket25%
20%
25%
216%
PD % increase from Jun2004 to Jun2008
15%
211%213%
250%
10%201%
170%
151%
5%109%
181%
Jun2004 Jun2006 Jun2008
0%A1 A2 A3 A4 A5 D1 D2 D3 NS
* Note, LGD provides further differentiation between best and worst risk grades, expected loss in worst bucket ~20x best bucket opposed to ~10x difference in PD
Jun2004 Jun2006 Jun2008
Repo asset value to accounting balanceRepo asset value to accounting balance… AND POORER ASSET RECOVERIES AS DEMAND WANED… AND POORER ASSET RECOVERIES AS DEMAND WANED
Downturn
p gp g
Downturn recoveries Recoveries depressed Downturn recoveries elevated due to
Rand depreciation linked vehicle
inflation
– retail downturn with limited vehicle
inflation
THE END RESULT IS A CYCLICAL RETAIL BAD DEBT CHARGE
THE END RESULT IS A CYCLICAL RETAIL BAD DEBT CHARGE
2 5%
Bad debt p.a., WesBank MotorBad debt p.a., WesBank Motor
2.2%
2.0%
2.5%
1.5%
1.7%
1.2% 1 2%
1.6%1.4%1.4%1.5%
1.0%
1.2% 1.2%
1.0% 0.9%
0.6% 0 6% 0 6%
1.0%0.9%1.0%
0.6% 0.6%
0.5%
0.0%1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
CrunchGrowthRecoveryCrunchGrowth
• Recent history• Simple down cycle model
Predictability is vital• Predictability is vital• The shock• Why the current cycle is different• Management actions• Where are we goinge e a e e go g
THE CURRENT CYCLE IS DIFFERENT AND WORSE THAN 98 …
THE CURRENT CYCLE IS DIFFERENT AND WORSE THAN 98 …
19981998 20082008• Preceding period of flat or no
growth• Preceding period of flat or no
growth
19981998• Largest post WWII growth
period• Largest post WWII growth
period
20082008
• Preceding period of volatile interest rates
• Preceding period of volatile interest rates
• Preceding period of extremely low interest rates (for SA)
• Preceding period of extremely low interest rates (for SA)
• Moderate debt-to-income levels of 60%
• Moderate debt-to-income levels of 60%
• Record debt-to-income levels near to 80%
• Record debt-to-income levels near to 80%
• Relatively flat oil and food prices
• Relatively flat oil and food prices
• Record oil and food prices
• Emergence of significant new middle class consumer
• Record oil and food prices
• Emergence of significant new middle class consumer
• Little demographic change in customer base
• Little demographic change in customer base
middle class consumer demographics
• Major new consumer
middle class consumer demographics
• Major new consumer• No major regulatory change• No major regulatory change
Major new consumer legislation enacted (NCA)Major new consumer legislation enacted (NCA)
• Recent• History
Simple down cycle• Simple down cycle• Predictability is vital• The shock
ff• Why the current cycle is different• Management actionsa age e t act o s• Where are we going
MANAGEMENT ACTIONS FOR THE CURRENT CYCLE STARTED AS FAR BACK AS THE END OF 2005!
MANAGEMENT ACTIONS FOR THE CURRENT CYCLE STARTED AS FAR BACK AS THE END OF 2005!STARTED AS FAR BACK AS THE END OF 2005!STARTED AS FAR BACK AS THE END OF 2005!
WesBank started slowly tightening Credit policy and scorecards from the end of 2005, which in retrospect showed great foresight –unfortunately the depth of the crunch was not foreseen otherwise deeper tightening during Q4 06 to Q3 07 especially of high risk
WesBank started slowly tightening Credit policy and scorecards from the end of 2005, which in retrospect showed great foresight –unfortunately the depth of the crunch was not foreseen otherwise deeper tightening during Q4 06 to Q3 07 especially of high risk
Credit tightening
deeper tightening during Q4 06 to Q3 07, especially of high risk businesses should have been performeddeeper tightening during Q4 06 to Q3 07, especially of high risk businesses should have been performed
THE FIRST MANAGEMENT ACTION WAS TO PROACTIVELY TIGHTEN ALREADY IN 2005 – WELL BEFORE THE END OFTHE FIRST MANAGEMENT ACTION WAS TO PROACTIVELY TIGHTEN ALREADY IN 2005 – WELL BEFORE THE END OFTIGHTEN ALREADY IN 2005 WELL BEFORE THE END OF
THE GROWTH CYCLE … TIGHTEN ALREADY IN 2005 WELL BEFORE THE END OF
THE GROWTH CYCLE …
80
Period of sustained tightening
Introduction of NCA/
New scorecards
Period of being deeper in the market
70 RecalibrationProblems at
bureaux
RecalibrationProblems at
bureaux60
bureauxbureaux
40
50
30
40
04 04 04 04 04 04 05 05 05 05 05 05 05 05 05 05 05 05 06 06 06 06 06 06 06 06 06 06 06 06 07 07 07 07 07 07 07 07 07 07 07 07 08 08 08 08 08 08 08
Jul 0
Aug
0Se
p 0
Oct
0N
ov 0
Dec
0Ja
n 0
Feb
0M
ar 0
Apr
0M
ay 0
Jun
0Ju
l 0A
ug 0
Sep
0O
ct 0
Nov
0D
ec 0
Jan
0Fe
b 0
Mar
0A
pr 0
May
0Ju
n 0
Jul 0
Aug
0Se
p 0
Oct
0N
ov 0
Dec
0Ja
n 0
Feb
0M
ar 0
Apr
0M
ay 0
Jun
0Ju
l 0A
ug 0
Sep
0O
ct 0
Nov
0D
ec 0
Jan
0Fe
b 0
Mar
0A
pr 0
May
0Ju
n 0
Jul 0
THIS WAS DONE REGARDLESS OF THE IMPACT ON MARKET SHARE …
THIS WAS DONE REGARDLESS OF THE IMPACT ON MARKET SHARE …
40
35
40WesBankStandard Asset FinanceAbsaNedbank/MFCOtherCash
25
30
15
20
5
10
0
Jul-
05
Aug-
05
Sep-
05
Oct-
05
Nov-
05
Dec-
05
Jan-
06
Feb-
06
Mar-
06
Apr-
06
May-
06
Jun-
06
Jul-
06
Aug-
06
Sep-
06
Oct-
06
Nov-
06
Dec-
06
Jan-
07
Feb-
07
Mar-
07
Apr-
07
May-
07
Jun-
07
Jul-
07
Aug-
07
Sep-
07
Oct-
07
Nov-
07
Dec-
07
Jan-
08
Feb-
08
Mar-
08
Apr-
08
May-
08
Jun-
08
Jul-
08
Aug-
08
* May/June decline also partly attributed to re-pricing, which raised margin, but resulted in loss of especially very low priced business
MANAGEMENT ACTIONS FOR THE CURRENT CYCLE STARTED AS FAR BACK AS THE END OF 2005!
MANAGEMENT ACTIONS FOR THE CURRENT CYCLE STARTED AS FAR BACK AS THE END OF 2005!STARTED AS FAR BACK AS THE END OF 2005!STARTED AS FAR BACK AS THE END OF 2005!
WesBank started slowly tightening Credit policy and scorecards from the end of 2005, which in retrospect showed great foresight –unfortunately the depth of the crunch was not foreseen otherwise deeper tightening during Q4 06 to Q3 07 especially of high risk
WesBank started slowly tightening Credit policy and scorecards from the end of 2005, which in retrospect showed great foresight –unfortunately the depth of the crunch was not foreseen otherwise deeper tightening during Q4 06 to Q3 07 especially of high risk
Credit tightening
deeper tightening during Q4 06 to Q3 07, especially of high risk businesses should have been performeddeeper tightening during Q4 06 to Q3 07, especially of high risk businesses should have been performed
Re-pricing, especially of high-risk business, is a critical part of restoring profitability and has been successfully achieved across Motor, Loans and Corporate
Re-pricing, especially of high-risk business, is a critical part of restoring profitability and has been successfully achieved across Motor, Loans and Corporate
Re-pricing
WESBANK MOTOR MARGIN AND PROJECTED PROFITABILITY SHOWS THE POSITIVE IMPACT OF
WESBANK MOTOR MARGIN AND PROJECTED PROFITABILITY SHOWS THE POSITIVE IMPACT OF
SIGNIFICANT RE-PRICINGSIGNIFICANT RE-PRICINGCombined Interest and Non-Interest Yield for Motor Division in Month of
Origination % ProjectedCombined Interest and Non-Interest Yield for Motor Division in Month of
Origination % ProjectedOrigination % ProjectedOrigination % Projected
MANAGEMENT ACTIONS FOR THE CURRENT CYCLE STARTED AS FAR BACK AS THE END OF 2005!
MANAGEMENT ACTIONS FOR THE CURRENT CYCLE STARTED AS FAR BACK AS THE END OF 2005!STARTED AS FAR BACK AS THE END OF 2005!STARTED AS FAR BACK AS THE END OF 2005!
WesBank started slowly tightening Credit policy and scorecards from the end of 2005, which in retrospect showed great foresight –unfortunately the depth of the crunch was not foreseen otherwise deeper tightening during Q4 06 to Q3 07 especially of high risk
WesBank started slowly tightening Credit policy and scorecards from the end of 2005, which in retrospect showed great foresight –unfortunately the depth of the crunch was not foreseen otherwise deeper tightening during Q4 06 to Q3 07 especially of high risk
Credit tightening
deeper tightening during Q4 06 to Q3 07, especially of high risk businesses should have been performeddeeper tightening during Q4 06 to Q3 07, especially of high risk businesses should have been performed
Re-pricing, especially of high-risk business, is a critical part of restoring profitability and has been successfully achieved across Motor, Loans and Corporate
Re-pricing, especially of high-risk business, is a critical part of restoring profitability and has been successfully achieved across Motor, Loans and Corporate
Re-pricing
Reducing volume and margin requires significant attention on cost t i t hi h h b hi d ith i i l i i
Reducing volume and margin requires significant attention on cost t i t hi h h b hi d ith i i l i iC t f containment, which has been achieved with minimal increase in
spend from the 07 to 08 financial yearscontainment, which has been achieved with minimal increase in spend from the 07 to 08 financial years
Cost-focus
WesBank Cost to IncomeWesBank Cost to IncomeSouth African Inst/Fin BusinessSouth African Inst/Fin Business
Cost to IncomeCost to Income
60.00%
40.00%
50.00%
20.00%
30.00%
0.00%
10.00%
2003 2004 2005 2006 2007 2008
Cost to Income Poly. (Cost to Income)
WesBank Cost to AssetsWesBank Cost to AssetsSouth African Inst/Fin BusinessSouth African Inst/Fin Business
Cost to Assets
South African Inst/Fin BusinessSouth African Inst/Fin Business
2.50%
3.00%
2.00%
1.00%
1.50%
0.00%
0.50%
0.00%2003 2004 2005 2006 2007 2008
Cost to Assets Poly. (Cost to Assets)
VARIOUS CREDIT PRODUCTS AS THEY HAVE COME UNDER PRESSURE IN THIS CYCLE
VARIOUS CREDIT PRODUCTS AS THEY HAVE COME UNDER PRESSURE IN THIS CYCLEUNDER PRESSURE IN THIS CYCLE…UNDER PRESSURE IN THIS CYCLE…
MIDMARKETLOANS
CREDITCARDS
LUXITEMS
USEDCARS
NEWCARS
HOME-LOANS
CORPLOANS
LOANS
MANAGING THE DOWN CYCLEMANAGING THE DOWN CYCLE
• Sail with an experienced crew• Sail with an experienced crew
• Pull management team together and talk and act with one voice
• Face realities
• Pull management team together and talk and act with one voice
• Face realities• Face realities• Repricing• Advances book
• Face realities• Repricing• Advances book
• Don’t panic• Management must at least appear to be in control
• Don’t panic• Management must at least appear to be in controlManagement must at least appear to be in control
• Budget vs reality
Management must at least appear to be in control
• Budget vs reality
• Take early decisions on cost-cutting• Take early decisions on cost-cutting
MANAGING THE DOWN CYCLEMANAGING THE DOWN CYCLE
• Create a positive visionO i
• Create a positive visionO i• Over communicate
• Motivate your people• Put your arms around your best people
• Over communicate• Motivate your people• Put your arms around your best peopley y p p
• External / internal focus• Roadshow
y y p p
• External / internal focus• Roadshow• Roadshow• Over communicate• You can’t manage what is not on your books
• Roadshow• Over communicate• You can’t manage what is not on your books
Create the right platform for the future
• Test the water early on the way up• Test the water early on the way up
• Don’t build fat on the upswing• Don’t build fat on the upswing
• Recent history• Simple down cycle model
Predictability is vital• Predictability is vital• The shock• Why the current cycle is different• Management actions• Where are we goinge e a e e go g
ARREAR TRENDS SHOWING IMPROVEMENT ACROSS ALL ARREAR BUCKETS – MOTOR ARREARS DECLINING
ARREAR TRENDS SHOWING IMPROVEMENT ACROSS ALL ARREAR BUCKETS – MOTOR ARREARS DECLININGALL ARREAR BUCKETS – MOTOR ARREARS DECLINING
NOW FOR 6 MONTHSALL ARREAR BUCKETS – MOTOR ARREARS DECLINING
NOW FOR 6 MONTHSTotal Bank Arrears (Month End)Total Bank Arrears (Month End)
7 47.77.77 67.77 67 58
9
7.37.47.77.67.77.67.56.96.66.56.3
5.45 36
7
8
1+2+35.45.35.1
4.54.54.33.63.63.83.83.83.73.63.4
3 14
5
%
3+6+
3.12.92.72.52.22.11.81.71.61.6
1.91.92.02.01.91.91.71.61.51.31.21 12
3
1.21.10.90.80.70.70.70.7 0.30.30.30.30.30.30.30.20.20.10.10.10.10.10.10.10.10.10
1
r-07
r-07
y-07
n-07
ul-0
7
g-07
p-07
t-07
v-07
c-07
n-08
b-08
r-08
r-08
y-08
n-08
ul-0
8
g-08
Ma
Ap May Ju
n
Ju Aug
Sep
Oct
Nov
Dec Ja
n
Feb
Ma
Ap Ma y Ju
n
Ju Aug
LESS REPOSSESSIONS FROM MORE RECENT BUSINESSMORE RECENT BUSINESS DECREASING AS
LESS REPOSSESSIONS FROM MORE RECENT BUSINESSMORE RECENT BUSINESS DECREASING ASMORE RECENT BUSINESS DECREASING AS
PERCENTAGE OF REPOSMORE RECENT BUSINESS DECREASING AS
PERCENTAGE OF REPOS
Repossessions WesBank Motor (Excl TFS)% repos performed in the month
% of repos coming out of more recent business is lower than historical averages of 7.25% for 0-6 months and 20.4% for 0-12 months
Decreasing trend from 2006 levels
WHAT NEXT …WHAT NEXT …• Rate decreases of 2-3% expected during 2009 will assist with normalising volumes
from currently very depressed state
• However, the recovery cycle will take time as consumers de-lever to 60-70% debt-to-household income range (unlikely to ever reach 50% again) – don’t expect to see
• Rate decreases of 2-3% expected during 2009 will assist with normalising volumes from currently very depressed state
• However, the recovery cycle will take time as consumers de-lever to 60-70% debt-to-household income range (unlikely to ever reach 50% again) – don’t expect to seehousehold income range (unlikely to ever reach 50% again) don t expect to see 2006 volumes anytime soon
• Selective and gradual improvement in Market Share as competitor credit appetite wanes
household income range (unlikely to ever reach 50% again) don t expect to see 2006 volumes anytime soon
• Selective and gradual improvement in Market Share as competitor credit appetite wanes
18%
Sep-02
• Strong growth cycle therefore likely still a number of years away• Strong growth cycle therefore likely still a number of years away
16%
17%
te
Sep-02
Jun-03 A 08Jun-08
Recovery ?
14%
15%
Prim
e ra
Jun 03
Oct-07Dec-07
Apr-08
13%50% 55% 60% 65% 70% 75% 80%
Debt-to-Household-Income
Sep-03 Aug-07