| Tue 2 Dec 2008, 8:53 | | FSR / FSRP / FSPP - FirstRand Limited - Trading Statement |
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FSR FSRP FSPP
FSR
FSR / FSRP / FSPP - FirstRand Limited - Trading Statement
FirstRand Limited
(Incorporated in South Africa)
(Registration number 1966/010753/06)
JSE Ordinary Share Code: FSR
JSE ISIN: ZAE000066304
JSE "B" Preference Share Code: FSRP
JSE ISIN: ZAE000060141
JSE "B1" Preference Share Code: FSPP
JSE ISIN: ZAE000070900
NSX Ordinary Share Code: FSR
("FirstRand" or "the Group")
TRADING STATEMENT
Operating Environment
When announcing results for the year to June 2008, FirstRand highlighted to
shareholders that it expected the macro environment, both domestically and
globally, to remain challenging. This scenario has played out more negatively
than expected, characterised by:
- a severe crisis in international markets and economies;
- slowing GDP growth;
- high interest rates and inflation;
- reducing disposable income levels;
- falling house and equity prices; and
- a weakening Rand.
Impact of the macro environment on franchises
In the Group`s retail lending businesses impairment levels have continued to
increase as anticipated. Advances are flat year on year and corporate lending
is growing at materially lower levels than in the previous corresponding
reporting period.
FNB`s mortgage book is experiencing significant increases in bad debts
accentuated by the severe cyclical downturn in the property market. As a
result, profitability in the HomeLoans division has been severely impacted.
Residential mortgage impairments are currently at 148 bps (compared to the
122 bps experience disclosed for the 6 months ended June 2008) and we expect
them to worsen further to about 160 bps for the year to 30 June 2009. FNB`s
other businesses, such as the commercial and corporate segments, continue to
perform well, however, the losses in the mortgage business will result in
FNB`s earnings being down on the previous corresponding reporting period.
The balance sheet is not exposed to the structured credit asset classes
currently contaminating international markets. The asset quality
deterioration and bad debts are in line with the Group`s expectations given
the cycle. The Group is of the view that while interest rates have probably
peaked, the deterioration in the credit cycle will continue into 2009. Risk
in the corporate sector is increasing, but the Group believes it is
adequately provided.
Similarly, WesBank`s profitability has also been negatively affected and is
expected to be materially down on the six months to 31 December 2007. This
will negatively impact the Group`s earnings given the relative size of
WesBank in the overall retail lending portfolio. WesBank`s bad debt
experience is traditionally a lead indicator in the cycle. Since
September 2008, arrears have begun to show signs of stabilising, which
provides some cause for cautious optimism that the bad debt cycle will bottom
soon after the peak of the interest rate cycle.
WesBank`s MotorOne advances book in Australia has successfully been disposed
of to BMW Australia Finance. The sale realised a loss of R220 million in the
period, which includes all costs associated with the disposal of the book and
closure of the business. The sale of Worldmark has been put on hold given
current market conditions.
The Group previously announced its intention to enter the vehicle finance
market in Brazil via a joint venture between WesBank and Banco do Brasil.
Considering the current state of world markets, the decision has been made
not to pursue this opportunity.
RMB continued to de-risk its international equity trading portfolios. At
June 2008 this portfolio was 15% of its peak levels. Against a backdrop of
massive turmoil in global markets, particularly during October, we were
unable to avoid incurring further losses in selling down the remaining
exposures. For the six month period to December 2008 these losses will be
approximately R260 million. The portfolio has now been reduced to a gross
value of approximately US$18 million. Given its size, we do not anticipate
profits or losses that will be material in the next six months.
RMB incurred significant losses following the collapse of Dealstream. These
losses consist of a bad debt provision of approximately R220 million for our
claim against Dealstream and a loss of around R115 million on the disposal of
the portfolio it had to take over from Dealstream. All that remains of the
portfolio are significant investments in Vox Telecom Limited (R318 million),
Simmers & Jack Mines Limited (R359 million) and Control Instruments
(R51 million). As a result of the significant shareholding in and influence
that we now have over these companies, we are obliged to account for them as
associates and these investments will be managed as part of our private
equity portfolio. If these investments were marked-to-market from the time
they were placed in the private equity portfolio, the mark-to-market loss at
28 November 2008 would be about R265 million. This will be reflected as a
reduction in the unrealised value of our private equity portfolio, which was
R1.96 billion at 30 June 2008. The Group believes value can be extracted from
these investments over the longer term.
RMB`s client franchise businesses, namely Fixed Income, Currencies and
Commodities (FICC) and Investment Banking, continue to perform well, and
Private Equity has realised significant profits in the first half of the
year. However, the continued losses from the international portfolio,
combined with the losses relating to Dealstream, are expected to result in
RMB`s earnings for the six months to 31 December 2008 being approximately 20%
down on the six months to 31 December 2007, but about 5% up on the 6 month
period to 30 June 2008.
Although Momentum`s overall results are less geared to investment markets,
earnings could not escape the impact of the current market declines. The
investment businesses are more directly impacted both in terms of asset-based
fees and lower than expected net inflows. The remaining businesses are more
correlated to the effects of lower levels of economic activity and lower
growth expectations. As a result, Momentum`s earnings are expected to
decrease in the current reporting period.
Focus areas
The Group`s focus in the current cycle is to ensure a resilient balance sheet
and it has adjusted its risk profile appropriately.
The Group`s funding position remains robust. It has low reliance on funding
in the international markets and it has appropriate liquidity buffers given
the level of uncertainty in financial markets. Excess liquidity buffers are
sufficient to deal with roll-over risk in the international balance sheet,
which has been significantly de-risked.
FirstRand`s capital management strategy remains conservative. Economic risk
is backed by Core Tier 1 capital. The Banking Group`s capital adequacy ratios
are robust with a current core Tier 1 ratio of 10.52% (against our target of
8.25%), which is well in excess of the regulatory minimum of 5.25%, and
overall capital adequacy is 14.10%. Momentum`s capital adequacy is at 1.5x
CAR.
Earnings guidance
When announcing results for the year to June 2008 FirstRand highlighted to
shareholders that, given the uncertain trading conditions, the Group did not
believe it was appropriate to predict earnings for the financial year to
June 2009.
However, whilst four weeks remain until the end of FirstRand`s first half, it
is clear to the Board that the combination of the acceleration of bad debts
in the retail businesses combined with the losses incurred in the investment
bank, will negatively impact the Group`s earnings for the financial year to
30 June 2009.
Pro forma diluted normalised earnings for the half year to December 2008 are
expected to be down by between 18% and 26% compared to December 2007.
However, if compared to the six month period to June 2008, this would
represent an earnings increase of between 1% and 9%. The ROE of the Group is
expected to be between 17% and 19%.
Barring any unforeseen circumstances, the Group is reasonably certain that
pro forma diluted normalised earnings per share for the full year to
30 June 2009 will be down between 0% and 15%.
The table below shows the earnings expectations for the Group`s EPS, HEPS and
pro forma diluted normalised EPS for the six months to December 2008 compared
to the six months to December 2007.
6 Months to Earnings guidance
December 2007 for the 6 months
to December 2008
Actual earnings per share 121.3 cents
(EPS)* (R6.3bn) -33% to -25%
Actual headline earnings per 110.1 cents
share (HEPS)* (R5.7bn) -22% to -14%
Diluted pro forma normalised 105.6 cents
earnings per share (R5.9bn) -26% to -18%
* Comparative period includes Discovery
The table below shows the earnings expectations for the Group`s EPS, HEPS and
pro forma diluted normalised EPS for the six months to December 2008 compared
to the six months to June 2008.
6 Months to June Earnings
2008 guidance
for the 6
months to
December 2008
Actual earnings per share 96.9 cents
(EPS)* (R5bn) -14% to -6%
Actual headline earnings per 81.4 cents
share (HEPS)* (R4.2bn) +8% to +16%
Diluted pro forma normalised 78.8 cents
earnings per share (R4.4bn) +1% to +9%
* Comparative period includes Discovery
Barring any unforeseen circumstances and excluding any impact of changes in
current interest rates, the Group is reasonably certain that earnings for the
year to June 2009 compared to June 2008 will be as follows:
Year to June 2008 Earnings guidance
for the year to
June 2009
Actual earnings per share 218.2 cents
(EPS)* (R11.3bn) -23% to -8%
Actual headline earnings per 191.5 cents
share (HEPS)* (R9.9bn) -15% to 0%
Diluted pro forma normalised 184.4 cents
earnings per share (R10.4bn) -15% to 0%
* Comparative period includes Discovery
The Group`s focus on maintaining a sound balance sheet, combined with the
strength of its franchises and diversified earnings base, has allowed it to
withstand significant losses in the equity trading businesses and higher bad
debts, whilst continuing to generate meaningful profits to shareholders.
The financial information on which this trading statement is based has not
been reviewed or reported on by FirstRand`s auditors.
Details of FirstRand`s results for the six months ending 31 December 2008 are
expected to be released on SENS and published in the press on or about
10 March 2009.
Sandton
2 December 2008
Sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
Date: 02/12/2008 08:53:14 Produced by the JSE SENS Department.
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