| Tue 24 Feb 2009, 13:45 | | MTL - Mercantile Bank - Condensed audited results for the year ended |
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MTL
MTL
MTL - Mercantile Bank - Condensed audited results for the year ended
31 December 2008
MERCANTILE BANK Holdings Limited
Member of CGD Group
Registration number 1989/000164/06
Share code: MTL ISIN: ZAE000064721
("Mercantile" or "the Group")
Condensed audited results for the year ended 31 December 2008
Highlights
Before taxation performance
- Growth in profit of 56.0%
- Growth in HEPS of 55.3%
- ROE of 26.2%
- ROA of 4.9%
- Improvement in cost to income from 56.4% to 49.0%
After taxation performance: recognition of deferred taxation
- Growth in HEPS of 156.8%
- ROE of 39.8%
- ROA of 7.9%
FINANCIAL OVERVIEW
Before taxation performance
The Group has again recorded a strong growth in profit, which increased by
56.0% for the 2008 financial year compared to the 2007 financial year. Headline
earnings per share increased by 55.3%. These increases are largely attributable
to:
- an increase in net interest income (after credit losses) of 49.8% as a
result of the positive endowment effect of higher interest rates, higher capital
due to profit retention, growth in lending of 20.9% and growth in deposits of
16.5%;
growth in gross recurring non-interest income of 47.9% (net of costs growth:
- 24.6%) from core business activities with a particularly strong
contribution from treasury; and
- non-recurring gains of R9.8 million on the disposal of Visa shares as part
of that entity`s public listing.
Costs increased year on year by 16.7% of which 12.5% relates to increased
employee costs. The higher employee costs are largely due to salary package
adjustments, increased headcount to support business growth as well as higher
performance bonus costs in line with the Group`s results. Efficiency continues
to improve with the overall cost to income ratio reducing from 56.4% in
December 2007 to 49.0%. Expenses (e.g. interchange and broker fees) incurred
directly in the generation of fee and commission income, previously included in
operating expenditure are now deducted from fee and commission income in
determining the cost to income ratio and presented accordingly in the income
statement. Comparatives have been adjusted.
In line with market conditions, loans and advances have reflected some stress
resulting in non-performing loans and advances as a percentage of total lending
increasing to 3.8% as at December 2008 from a level of 2.5% in December 2007.
Return on average equity ("ROE") improved to 26.2% (December 2007: 21.9%)
whilst return on average assets ("ROA") was at 4.9% (December 2007: 3.6%).
After taxation performance: recognition of deferred taxation
In accordance with International Financial Reporting Standards the Group deemed
it appropriate to recognise deferred taxation at the end of 2008 mainly in
respect of taxation losses incurred in the financial years prior to 2005. The
effect of this recognition resulted in a non-recurring taxation credit of
R162.2 million for the year ended 31 December 2008.
The impact of this credit on the key performance ratios of the Group was:
Headline earnings per share increased year on year by 156.8%, ROE of 39.8% and
ROA of 7.9%.
CREDIT RATINGS
Caixa Geral de Depositos S.A. ("CGD"), which is wholly owned by the Portuguese
state, remains the Group`s holding company with a shareholding of 91.75%.
Its short and long-term financial liability ratings were confirmed by the three
leading international rating agencies - Fitch Ratings, Moody`s and Standard &
Poor`s as follows:
Short term Long term Date Outlook
Fitch Ratings F1+ AA- October 2008 Stable
Moody`s P-1 Aa1 November 2008 Stable
Standard & Poor`s A-1 A+ January 2009 Stable
Moody`s Investors Service confirmed the following RSA national scale issuer
ratings to Mercantile Bank in September 2008:
Short term P-1.za
Long term A2.za
Outlook Stable
ACCOUNTING POLICIES
The Group financial results have been prepared on the historical cost basis
excluding financial instruments and properties which are fair valued and
conform to International Financial Reporting Standards. The accounting policies
are consistent with those applied in the annual financial statements for the
financial year ended 31 December 2007, except for IFRIC 11 - IFRS 2 Group and
Treasury transactions, which is effective for annual reporting periods
beginning on or after 1 March 2007 and was adopted in 2008. These condensed
financial statements have been prepared in terms of IAS 34 - Interim Financial
Reporting.
AUDIT OPINION
The independent auditors, Deloitte & Touche, have issued their unmodified
opinion on the Group`s financial statements for the year ended 31 December
2008. The audit was conducted in accordance with International Standards on
Auditing. A copy of their audit report is available for inspection at
Mercantile`s registered office. These condensed financial statements have been
derived from the Group financial statements and are consistent in all material
respects, with the Group financial statements.
GOING CONCERN
The financial statements have been prepared on the going concern basis.
POST BALANCE SHEET EVENTS
No material events have occurred between the accounting date and the date of
this report that require adjustment to or disclosure in the annual financial
statements.
DIRECTORATE
Tapiwa Njikizana was appointed as an independent non-executive director on 6
November 2008.
Julio Lopes, an executive director seconded to the Group by CGD had his
contract renewed for a further 3 years from 9 November 2008.
Dave Brown, the CEO, was reappointed with effect from 29 March 2009 for a
further period of 3 years.
NEW BANKING SYSTEM
The implementation of the replacement of the core retail banking systems and
enhancement/upgrade of current systems architecture is well under way with a
go-live date planned for the first quarter of 2010. Expenditure capitalised on
this project as at 31 December 2008 is as follows:
- Property and equipment: R21.2 million; and
- Intangible assets: R74.6 million
Following on completion of the process mapping phase of the project in December
2008 which has increased the scope in terms of functionality required, the
design of an operational data store as a platform for future management
information, tactical and strategic reporting, coupled with the revised plan to
implement the system in the first quarter of 2010 (vs. the last quarter of
2009, primarily to accommodate a more recent version of software release), the
overall spend on the project is now expected to increase to an estimated R210
million. As previously communicated, the increase in the original estimated
cost was mainly due to the expanded scope in terms of upgrading/enhancing the
current systems architecture of the Bank.
Most cost estimates have now become firm by way of concluding rand based
contracts. The project will be funded from cash resources over the period of
the project against agreed deliverables.
The pro forma effect of the transaction on the tangible net asset value per
share of the Group at 31 December 2008, based on the above revised cost
estimates, is expected to be a decrease of approximately 2.6 cents. The pro
forma effect of the transaction has not been reviewed or reported on by the
Group`s auditors.
The rationale for this project remains the creation of a new systems platform
to support the growth of the Group in line with our strategic objectives. The
project will result in a more flexible and integrated systems environment
enhancing our risk management and controls whilst providing us with greater
capacity to compete in the market in the areas of product and service. No
profits can be directly attributed to this project but the project drivers
outlined above are expected to provide a positive benefit to the Group over
time.
OUTLOOK
The current difficult global economic conditions are expected to have an
increasingly negative impact on the South African economy. This, together with
the high level of consumer indebtedness on the domestic front will make 2009 an
extremely challenging year. In addition, Woolworths Financial Services have
advised Mercantile that its card processing agreement will be terminated in the
second half of 2009, following the sale of a controlling stake in the business
to a competitor bank, which will put pressure on the rate of growth in fee
income during the coming year. Similarly, the lower interest rate environment
expected to prevail in 2009 will impact negatively on the Group`s net interest
income (negative endowment) given the structure of the Group`s funding sources.
J A S de Andrade Campos D J Brown
Chairman Chief Executive Officer
Sandton
24 February 2009
Condensed Group Balance Sheet
2008 2007
R`000 R`000
Audited Audited
R`000 R`000
ASSETS
Intangible assets 76 894 23 569
Property and equipment 128 672 96 969
Other accounts receivable 39 273 23 639
Interest in associated company - 4 251
Other investments 12 315 228
Deferred taxation assets 157 275 -
Non-current assets held for sale 5 289 -
Loans and advances 3 403 789 2 814 743
Derivative financial instruments 56 873 43 814
Negotiable securities 247 141 275 577
Bank term deposits (1) 324 295 170 618
Cash and cash equivalents (1) 1 464 959 1 252 376
Total assets 5 916 775 4 705 784
EQUITY AND LIABILITIES
Shareholders` equity 1 269 030 839 914
Share capital and share premium 1 202 571 1 207 422
Capital redemption reserve fund 3 788 3 788
Share-based payments reserve (2) 4 650 7 019
General reserve 7 478 7 478
Property revaluation reserve 46 364 53 705
Available-for-sale reserve 13 036 (48)
General credit-risk reserve (3) - 19 403
Accumulated loss (8 857) (458 853)
Non-current liability
Deferred taxation liabilities 15 259 -
Liabilities 4 632 486 3 865 870
Deposits 4 389 347 3 768 183
Derivative financial instruments 95 091 15 356
Provisions 48 596 42 435
Other accounts payable 98 958 39 780
Taxation 494 116
Total equity and liabilities 5 916 775 4 705 784
Condensed Group Income Statement
2008 2007
R`000 R`000
Audited Audited
Interest income 661 776 467 247
Interest expense (337 813) (250 012)
Net interest income 323 963 217 235
Net charge for credit losses (6 618) (5 358)
Net interest income after credit losses 317 345 211 877
Net gain on disposal and revaluation
of available-for-sale investments 9 837 5 602
Non-interest income 260 003 190 871
Recurring 260 003 175 796
Non-recurring - 15 075
Fee and commission expenditure (4) (76 968) (28 841)
Net interest and non-interest income 510 217 379 509
Operating expenditure (4) (253 154) (216 978)
Operating profit 257 063 162 531
Share of income from associated company 735 2 771
Profit before taxation 257 798 165 302
Taxation 162 175 (29)
Profit after taxation 419 973 165 273
Earnings per ordinary share after
taxation (cents) 10.70 4.21
Earnings per ordinary share before
taxation (cents) 6.57 4.21
Diluted earnings per ordinary share
after taxation (cents) 10.70 4.21
Diluted earnings per ordinary share
before taxation (cents) 6.57 4.21
Dividend per share (cents) - -
Reconciliation between profit before taxation
and headline earnings
Profit before taxation 257 798 165 302
Adjustment for:
Realisation of available-for-sale reserve on
disposal of investments (9 837) (5 602)
(Profit)/Loss on disposal of
property and equipment (29) 13
Headline earnings before taxation 247 932 159 713
Taxation 162 175 (29)
Headline earnings after taxation 410 107 159 684
Headline earnings per ordinary share
after taxation (cents) 10.45 4.07
Headline earnings per ordinary share
before taxation (cents) 6.32 4.07
Diluted headline earnings per ordinary
share after taxation (cents) 10.45 4.07
Diluted headline earnings per ordinary
share before taxation (cents) 6.32 4.07
Financial Statistics
2008 2007
Audited Audited
Number of ordinary shares in issue:
- end of year (`000) 3 911 114 3 926 538
- weighted average (`000) 3 924 414 3 925 485
- weighted average - diluted (`000) 3 924 414 3 925 485
Return on average equity after taxation (%) 39.8 21.9
Return on average equity before taxation (%) 26.2 21.9
Return on average assets after taxation (%) 7.9 3.6
Return on average assets before taxation (%) 4.9 3.6
Cost to income (%) 49.0 56.4
Net asset value per ordinary share (cents) 32.4 21.4
Tangible net asset value per ordinary
share (cents) 30.5 20.8
Condensed Group Contingent Liabilities and
Commitments
2008 2007
Audited Audited
Guarantees, letters of credit and committed
undrawn facilities 670 100 634 861
Operating lease commitments 12 302 7 593
Capital commitments 93 018 -
Condensed Group Statement of Changes in Equity
2008 2007
R`000 R`000
Audited Audited
Balance at beginning of the year 839 914 667 418
Movements in reserves (16 029) 12 296
Revaluation of owner-occupied properties 10 689 8 117
Transfer from revaluation surplus to deferred
taxation liability (18 030) -
Transfer (from) share-based payments reserve (2) (7 019) -
Share-based payments expense (2) 4 650 3 994
Transfer (from)/to general credit-risk reserve (3) (19 403) 5 449
Net transfer to/(from) available-for-sale reserve 13 084 (5 264)
Movements in accumulated loss 449 996 159 824
Profit after taxation 419 973 165 273
Transfer from share-based payments reserve (2) 7 019 -
Share-based payments expense (2) 3 601 -
Transfer from/(to) general credit-risk reserve (3) 19 403 (5 449)
Movement in share capital and share premium
(Increase)/Reduction of treasury shares held
within the Group (4 851) 376
Balance at end of the year 1 269 030 839 914
Condensed Group Cash Flow Statement
2008 2007
R`000 R`000
Audited Audited
Net cash inflow/(outflow) from operating activities 291 296 (7 861)
Net cash (outflow) from investing activities (78 713) (10 482)
Net cash inflow/(outflow) for the year 212 583 (18 343)
Cash and cash equivalents at beginning
of the year (1) 1 252 376 1 270 719
Cash and cash equivalents at end
of the year (1) 1 464 959 1 252 376
Condensed Group Segmental Information
2008 2007
R`000 R`000
Audited Audited
Segment revenue net of fee and
commission expenditure (4)
Retail and Commercial banking (5) 347 155 241 602
Treasury 59 612 40 046
Alliance banking, MBL credit card
and electronic banking (5) 53 799 53 316
Other services (6) 56 269 49 903
516 835 384 867
Profit after taxation
Retail and Commercial banking (5) (7) 268 249 183 740
Treasury (7) 41 638 23 686
Alliance banking, MBL credit card
and electronic banking (5) (7) 30 801 19 231
Other services (8) 79 285 (61 384)
419 973 165 273
Material Related Party Balances and Transactions
2008 2007
R`000 R`000
Audited Audited
Net balances with CGD 1 345 707 897 792
Interest received from CGD 41 063 73 105
Explanatory notes:
(1) Bank term deposits with a residual maturity greater than three months from
reporting date are now presented separately in the Balance Sheet.
Comparatives for the year ended 31 December 2007 have been reclassified
accordingly.
(2) With the adoption of IFRIC 11 - IFRS 2 Group and Treasury transactions, a
share-based payments reserve in respect of the Mercantile Share Option Scheme
is not required. This reserve has therefore been transferred to accumulated
loss and share-based payments expense for this scheme are processed to
accumulated loss with effect from 1 January 2008.
In the case of the Mercantile Conditional Share Plan introduced in 2008, a
share-based payments reserve has been created to separate the effects of this
plan from other classes of reserves for management purposes.
(3) The new Bank Regulations, effective 1 January 2008, no longer require
general credit-risk reserves.
The balance of this reserve as at 31 December 2007 was transferred to
accumulated loss in 2008.
(4) Expenditure directly attributable to fee and commission income, previously
included under operating expenditure is now presented separately in the income
statement.
Comparatives for the year ended 31 December 2007 have been reclassified
accordingly.
(5) Certain term loans previously included with Alliance Banking, MBL credit
card and electronic banking are now presented as part of Retail and Commercial
banking.
Comparatives for the year ended 31 December 2007 have been reclassified
accordingly.
(6) "Other services" includes support divisions, surplus capital, insurance
brokers, taxation and inter-group eliminations.
(7) Excludes the allocation of attributable support costs.
(8) "Other services" includes support divisions, surplus capital, insurance
brokers, taxation, inter-group eliminations and associate income.
Directors: J A S de Andrade Campos* (Chairman), D J Brown
(Chief Executive Officer), J P M Lopes* (Executive), G P de Kock, L Hyne,
A T Ikalafeng, T H Njikizana**, S Rapeti *Portuguese **Zimbabwean
Group Secretary: R van Rensburg
Registered Office: Mercantile Bank, 142 West Street, Sandown, 2196
Share code: MTL ISIN: ZAE000064721
Transfer Secretaries: Computershare Investor Services (Pty) Limited,
70 Marshall Street, Johannesburg, 2001
Sponsor: Bridge Capital Advisors (Pty) Limited, 2nd Floor, 27 Fricker Road,
Illovo, 2196
www.mercantile.co.za
Date: 24/02/2009 13:45:02 Produced by the JSE SENS Department.
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