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FSR
FSR
FST - FirstRand Limited - Unaudited Interim Results For The Six Months Ended
31 December 2008, Cash Dividend Declaration And Revised Trading Statement
FirstRand Limited
(Incorporated in South Africa)
Registration No: 1966/010753/06
JSE code: FSR
ISIN: ZAE000066304
NSX share code: FST
Certain companies within the FirstRand Group are Authorised Financial
Services Providers
UNAUDITED INTERIM RESULTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2008, CASH
DIVIDEND DECLARATION AND REVISED TRADING STATEMENT
Introduction
This report covers the unaudited financial results of FirstRand Limited
("FirstRand" or "the Group") for the six months ended 31 December 2008 and
deals with the financial and operating performance of its main business
units. The Group consists of a portfolio of leading financial services
franchises; these are First National Bank ("FNB"), the retail and commercial
bank, Rand Merchant Bank ("RMB"), the investment bank, WesBank, the
instalment finance business, and Momentum, the life insurance business.
FirstRand operates these franchises through various legal entities.
Comprehensive reports on the Banking and Momentum Groups, both of which are
wholly owned can be obtained from the website, www.firstrand.co.za.
FINANCIAL HIGHLIGHTS
Continuing and Six months ended Year ended
discontinued operations 31 December 30 June
R million 2008 2007 % change 2008
Headline earnings 4 553 5 702 (20) 9 922
Normalised earnings 4 576 6 138 (25) 10 583
Diluted headline 87.3 107.4 (19) 187.8
earnings per share
(cents)
Diluted normalised 81.2 108.9 (25) 187.7
earnings per share
(cents)
Ordinary dividend per 34.00 44.25 (23) 82.5
share (cents)
Normalised return on 17 26 22
equity (%)
Assets under management 1 034 880 993 178 4 1 018 202
or administration
In November 2007, FirstRand unbundled its 57% shareholding in Discovery and
therefore the results to 31 December 2007 and 30 June 2008 in the table above
include four months of contribution from Discovery. The results for the
Group`s continuing operations are detailed below.
Continuing Six months ended Year ended
operations (proforma) 31 December 30 June
R million 2008 2007 % change 2008
Headline earnings 4 553 5 517 (17) 9 737
Normalised earnings 4 576 5 953 (23) 10 398
Diluted headline 87.3 103.9 (16) 184.3
earnings per share
(cents)
Diluted normalised 81.2 105.6 (23) 184.4
earnings per share
(cents)
Normalised return on 17 26 22
equity (%)
Assets under management 1 034 880 993 178 4 1 018 202
or administration
KEY FINANCIAL RESULTS AND RATIOS
Six months Year
ended ended
31 December % 30 June
R million 2008 2007 change 2008
From continuing and
discontinued operations
Normalised earnings 4 576 6 138 (25) 10 583
Headline earnings 4 553 5 702 (20) 9 922
Attributable earnings to 4 306 6 283 (31) 11 309
ordinary shareholders
Normalised net asset value 53 547 47 111 14 51 637
Normalised return on equity (%) 17.4 26.2 21.5
Normalised price to book 1.70 2.36 1.45
(times)
Normalised earnings per share
(cents)
- Basic 81.2 108.9 (25) 187.8
- Diluted 81.2 108.9 (25) 187.7
Earnings per share (cents)
- Basic 82.8 121.3 (32) 218.2
- Diluted 82.6 118.4 (30) 214.1
Headline earnings per share
(cents)
- Basic 87.6 110.1 (20) 191.5
- Diluted 87.3 107.4 (19) 187.8
Ordinary dividend per share 34.00 44.25 (23) 82.5
(cents)
Dividend in specie per share - 61.1 (100) 61.1
(cents)
Non cumulative non redeemable
preference
dividend per share (cents)
B Class (68% of FNB prime 477.77 431.1 11 908.9
lending rate)
B1 Class (68% of FNB prime 477.77 431.1 11 908.9
lending rate)
From continuing operations
Normalised earnings 4 576 5 953 (23) 10 398
Normalised return on equity (%) 17.4 26.3 21.9
Normalised earnings per share
(cents)
- Basic 81.2 105.6 (23) 184.5
- Diluted 81.2 105.6 (23) 184.4
STATEMENT OF HEADLINE EARNINGS FROM CONTINUING
AND DISCONTINUED OPERATIONS
Six months Year
ended ended
31 December % 30 June
R million 2008 2007 change 2008
Attributable earnings to 4 306 6 283 (31) 11 309
ordinary shareholders
Adjusted for: 247 (581) >100 (1 387)
Profit on disposal of - (130) (98)
available-for-sale assets
Loss/(profit) on sale of 29 (570) (678)
shares in subsidiary and
associate
Net asset value in excess of - - (24)
purchase price of subsidiary
Profit on disposal of (3) - (4)
property and equipment
Loss on sale of MotorOne 206 - -
Advances book
Impairment of intangible - - 104
assets
Impairment of goodwill 14 - 33
VISA listing - - (1 052)
Other (1) - 29
Total tax effects of 1 89 257
adjustments
Total minority interest of 1 30 46
adjustments
Headline earnings 4 553 5 702 (20) 9 922
Adjusted for: 23 436 (95) 661
Discovery BEE transaction - 5 5
IFRS 2 share based (111) 189 153
(income)/expense
Treasury shares 134 242 503
- adjustment for effective - (17) (17)
shareholding in Discovery
- consolidation of staff 221 221 517
share schemes
- FirstRand shares held by (87) 38 3
policyholders
Normalised earnings 4 576 6 138 (25) 10 583
Divisional normalised
earnings
Banking Group 4 149 5 283 (21) 8 814
Momentum Group 740 913 (19) 2 004
Discovery Group - 185 (100) 185
FirstRand Limited (company) (83) (49) 69 (11)
Dividend paid to non (230) (194) 19 (409)
cumulative non redeemable
preference shareholders
Normalised earnings 4 576 6 138 (25) 10 583
Divisional headline earnings
Banking Group 4 199 5 140 (18) 8 701
Momentum Group 752 881 (15) 1 979
Discovery Group - 185 (100) 185
FirstRand Limited (company) (34) (51) (33) (14)
Consolidation of staff share (221) (221) - (517)
schemes
Dividend paid to non (230) (194) 19 (409)
cumulative non redeemable
preference shareholders
Consolidation of treasury 87 (38) >100 (3)
shares held by policyholders
Headline earnings 4 553 5 702 (20) 9 922
STATEMENT OF HEADLINE EARNINGS FROM CONTINUING OPERATIONS (PROFORMA)
Six months ended Year ended
31 December % 30 June
R million 2008 2007 change 2008
Attributable 4 306 5 555 (22) 10 581
earnings to
shareholders
Adjusted for: 247 (38) >100 (844)
Profit on - (39) (7)
disposal of
available-for-
sale assets
Loss/(profit) on 29 - (108)
sale of shares
in subsidiary
and associate
Net asset value - - (24)
in excess of
purchase price
of subsidiaries
Profit on (3) - (4)
disposal of
property and
equipment
Loss on sale of 206 - -
MotorOne
Advances book
Impairment of - - 104
intangible
assets
Impairment of 14 - 33
goodwill
VISA listing - - (1 052)
Other (1) - 29
Total tax 1 1 169
effects of
adjustments
Total minority 1 - 16
interest of
adjustments
Headline 4 553 5 517 (17) 9 737
earnings
Adjusted for: 23 436 (95) 661
IFRS 2 share (111) 177 141
based
(income)/expense
Treasury shares 134 259 520
- consolidation 221 221 517
of staff share
schemes
- FirstRand (87) 38 3
shares held by
policyholders
Normalised 4 576 5 953 (23) 10 398
earnings
Normalised
earnings per
share (cents)
- Basic 81.2 105.6 (23) 184.5
- Diluted 81.2 105.6 (23) 184.4
Earnings per
share (cents)
- Basic 82.8 107.2 (23) 204.2
- Diluted 82.6 104.6 (21) 200.3
Headline
earnings per
share (cents)
- Basic 87.6 106.5 (18) 187.9
- Diluted 87.3 103.9 (16) 184.3
Number of shares
for calculation
of earnings and
headline
earnings per
share
Weighted average 5 198 676 271 5 180 135 651 5 182 541 623
number of shares
Diluted weighted 5 212 555 573 5 309 100 331 5 283 679 038
average number
of shares
Number of shares
for calculation
of normalised
earnings per
share
Weighted average 5 637 848 797 5 635 932 693 5 636 610 641
number of shares
Diluted weighted 5 637 848 797 5 638 245 993 5 638 111 774
average number
of shares
Return on equity 17.4 26.3 21.9
(%)
Average 52 592 45 186 47 449
normalised net
asset value
excluding
Discovery
Normalised 4 576 5 953 10 398
earnings
OVERVIEW OF RESULTS
Operating environment
The operating environment remained extremely difficult for the six months to
31 December 2008, characterised by further declines in asset prices,
continued market volatility and a deteriorating economic outlook, both
locally and internationally.
The international credit and liquidity crunch worsened significantly,
culminating in Governments rescuing and subsequently partly nationalising
some of the largest international financial institutions. Global economic
growth deteriorated rapidly, with the US, Japan and the UK officially
entering a recession.
Although the South African economy was to some extent sheltered from the
international economic turmoil, it was not immune to it, particularly with
regard to a significant slowdown in exports and a decline in commodity
prices. This, together with the high domestic inflation and interest rate
environment, contributed to a significant slowdown in GDP, with negative
growth of 1.8% being reported in the fourth quarter of 2008. Domestic
interest rates remained high during the reporting period, with the first
downward adjustment of 50bps occurring on 11 December 2008.
These factors negatively impacted asset growth and, combined with falling
equity and house prices and lower customer affordability levels, resulted in
further increases in bad debt levels, especially in the retail lending
franchises.
The All Share Index declined 29% in the period under review, with
commensurate downward pressure on fees derived from investment businesses.
The decline in asset values means that investment fees in Momentum will
continue to be charged against a lower asset base in the foreseeable future.
Overview of results
Against this background, FirstRand`s diverse portfolio of banking and
insurance businesses produced a mixed performance resulting in overall
proforma normalised earnings decreasing 23% to R4.6 billion with a normalised
Return on Equity ("ROE") of 17% compared to 26% in the comparative period.
The Banking Group`s corporate and commercial franchises, which operate in the
local primary and secondary markets, provided solid performances. However,
the retail franchises showed strain due to the current negative consumer
credit cycle. The total banking portfolio produced R4.1 billion of normalised
earnings, representing a 21% decline on the comparative period. Its
normalised ROE also declined to 18% (27% in 2007).
The earnings of the insurance subsidiary, Momentum Group, were negatively
impacted by the significant decline and volatility of the equity markets,
despite good new business growth and improving profit margins. Momentum`s
conservative capital management strategy immunised its earnings to some
extent against the impact of falling equity values. Despite this normalised
earnings reduced 19% to R740 million (R913 million in 2007) although the ROE
remained robust at 23%.
The table below represents the contribution to normalised earnings from the
Banking and Insurance Groups.
Six months Year
ended ended
31 December 30 June
% contri-
R million 2008 2007 bution 2008
Banking Group 4 149 5 283 91 8 814
Momentum 740 913 16 2 004
FirstRand* (313) (243) (7) (420)
Normalised earnings 4 576 5 953 100 10 398
* Including dividend paid to non cumulative non redeemable preference
shareholders.
The profitability of the Banking Group was impacted by two significant
issues:
- the negative gearing in its retail businesses, created by slowing advances
growth and increasing bad debts; and
- further losses in the investment bank`s Equity Trading division and losses
in offshore debt and investment portfolios which were originally part of SPJ
International ("SPJi").
Relative to its peer, the Banking Group has shown a sharper reduction in loan
growth over the past six months. This is due to a number of measured
strategic actions taken on the credit portfolio to enhance the risk return
characteristics of some portfolios and to reduce potential earnings
volatility caused by bad debts. These actions include:
- a deliberate reduction of international lending exposures as part of a
broader capital and liquidity preservation strategy in the international
activities;
- a targeted portfolio management strategy in selected retail segments to
reposition the portfolio in order to optimise the risk reward relationship
and reduce earnings volatility from new business production. For example, at
a product level, the expected property downturn required tightening of
collateral requirements in the residential mortgage lending portfolios; and
- implementation of improved netting arrangements in corporate loans as a
risk mitigation measure and selective reduction in activity in certain high
risk subsegments such as leveraged finance.
Uncertainty in the outlook on job losses and the overall macro economic
environment means that it is too early to substantially relax forward scoring
assumptions on retail loans. The medium term environment is closely monitored
and FirstRand believes the above mentioned strategies will allow its lending
businesses to accelerate out of the cycle.
The bad debt charge has increased by more than 100% from December 2007 to
R3.7 billion. This is the result of a significant increase in non performing
loans ("NPLs") from R7.7 billion to R18.6 billion, which amounts to 4.2% of
advances.
The bad debt charge amounts to 1.64% of advances (retail 2.41% and wholesale
0.66%) which compares favourably with the range which has been previously
communicated (1.65% - 1.75%). The NPL coverage ratio reduced from 47.4% to
34.3% which reflects the change in asset mix towards asset backed lending
such as mortgages and commercial properties and away from unsecured lending.
Major components of the bad debt charge are:
For the six months ended
December December June
2008 2007 2008
Bad debts R million R million R million
Residential mortgages 1 080 271 851
Credit card 605 557 527
Vehicle and asset finance 1 045 584 1 059
Retail other 631 408 608
Wholesale 538 236 277
Total bad debts 3 693 2 015 3 443
For the six months ended
December December June
2008 2007 2008
Bad debts % % %
Residential mortgages 1.48 0.42 1.21
Credit card 9.76 9.16 8.47
Vehicle and asset finance 2.22 1.21 2.18
Retail other 4.75 3.43 4.85
Wholesale 0.66 0.33 0.34
Total bad debts 1.64 0.97 1.54
Retail bad debts have continued to rise sharply across all areas, but
particularly in residential mortgages. With regard to vehicle finance,
arrears have shown positive signs of improvement over the past six months. It
remains to be seen whether this improvement is an early indicator of the peak
of the bad debts cycle, particularly if the international credit crisis
increasingly impacts the economy and results in further job losses and a
continued decline in asset values.
Wholesale impairments include R219 million relating to the default of
Dealstream, a futures clearing client. Overall the outlook on the large
corporate book is expected to remain negative.
Overview of the operating franchises
Below is a brief overview of each operating franchise.
Year
Six months ended ended
FNB 31 December 30 June
%
R million 2008 2007 change 2008
Normalised earnings 2 111 2 489 (15) 4 654
Total assets 207 324 204 734 1 211 412
Total liabilities 199 921 199 997 197 828
Bad debt ratio 2.1 1.2 1.55
ROE (%) 28 35 33
High inflation and high interest rates and elevated levels of consumer
indebtedness created a challenging operating environment for FNB,
particularly for the lending businesses in the consumer market. Given the
negative credit cycle FNB produced satisfactory results. Normalised earnings
decreased 15% from R2.5 billion to R2.1 billion and ROE reduced from 35% to
28%.
FNB`s strong franchises in the Commercial and Corporate segments contributed
earnings growth of 15% and 30% respectively driven by healthy growth in
advances, deposits and transactional volumes.
FNB`s diversified retail portfolio continued to show good growth in
transactional volumes and deposits, especially in the Mass segment. However,
the retail lending portfolios continued to show significant increases in
arrears, non performing loans and a marked slowdown in new business,
especially in the Consumer segment. This had a negative impact on revenue
growth and profitability.
FNB HomeLoans reported a loss of R975 million compared to a profit of R256
million in the corresponding period last year. The decrease in profitability
was driven by:
- the significant increase in the bad debt charge, as a result of the
increase in defaults;
- the increase of R340 million in interest in suspense due to increased NPLs
and higher funding costs; and
- a significant slow down in advances as a result of the repositioning of the
portfolio.
FNB continued to focus on cost management during the period and maintained
overall cost growth to below inflation, mainly as a result of the containment
of staff cost growth to 7%.
Six months Year
ended ended
FNB Africa 31 December 30 June
%
R million 2008 2007 change 2008
Normalised earnings 320 249 29 499
Total assets 30 121 25 353 19 29 413
Total liabilities 26 707 22 709 18 26 160
Bad debt ratio 0.6 0.8 0.7
ROE (%) 34 32 34
The FNB African subsidiaries performed well. Net income before tax increased
25% for the period to R658 million due to the strong results from FNB
Botswana, FNB Swaziland and FNB Mocambique.
Over the last few years the expansion of the retail network in all
subsidiaries, together with a focus on providing good service, the delivery
of products developed specifically to meet local requirements and the
electronic delivery initiatives, has resulted in an increased customer base
and good growth in volumes.
FNB has received approval from the South African Reserve Bank and the Bank of
Zambia for the establishment of a new full service bank in Zambia. The
intention is to offer a comprehensive range of retail, business, commercial
and corporate transactional banking products.
Six months ended Year ended
RMB 31 December 30 June
%
R million 2008 2007 change 2008
Normalised earnings 1 399 1 753 (20) 3 008
Total assets 317 959 258 721 23 296 433
Total liabilities 313 784 254 169 23 292 091
ROE (%) 20 32 25
RMB`s portfolio of businesses showed a mixed performance reporting normalised
earnings of R1.4 billion, down 20% on the prior period. The Investment
Banking division delivered a strong result, increasing profit before tax 21%.
The Fixed Income, Currencies and Commodities ("FICC") division also produced
strong profitability, 30% up from the comparative period. The Private Equity
division was down 7% on the comparative period.
RMB`s Equity Trading division reported disappointing losses of R798 million,
largely attributable to the continued de-risking of the international trading
portfolios and the default of Dealstream. These losses were anticipated as
the de-risking and sell-down in these portfolios continued. The remaining
positions, amounting to $18 million, are illiquid in nature and any further
reduction in positions is therefore unlikely.
In addition the offshore debt and investment portfolios, previously managed
by RMB`s SPJi division, were affected by the weaker global markets and
incurred mark to market losses of R555 million. The mark to market values do
not necessarily reflect the true value of these assets, as a large part of
the mark to market valuations reflect the illiquidity of the assets and could
reverse. However further mark to market volatility is expected in these
portfolios in the short to medium term. The SPJi division was discontinued in
the second half of 2008, when the portfolios were integrated into the
Investment Banking and FICC divisions to be reduced in a responsible manner.
RMB experienced healthy levels of corporate activity in its Investment
Banking division. Advisory income exceeded the comparative period and
infrastructure and acquisition financing volumes also increased over the
prior period. Strong annuity income was generated on the in-force lending
book.
The FICC business enjoyed strong client flows particularly in hedging and
structured products as customers sought protection in the highly volatile
currency and interest rate markets. Local proprietary trading activities
remained profitable.
Profits in the Equity Trading division`s client businesses showed good growth
but were offset by impairment charges of R219 million raised following the
default of Dealstream. These impairment charges were raised for the unpaid
margin and mark to market losses at the time of default.
Private Equity recorded strong realisation profits, though earnings from
associates declined 17% from the comparative period. RMB took over
Dealstream`s futures portfolio (with a nominal value of around R1 billion)
when it defaulted. Although smaller positions were closed out with little
loss, three large illiquid positions could not be closed out. These were
transferred to the private equity portfolio with a view to realising value
over the longer term and are now being accounted for as associates. A loss of
R116 million was incurred when these positions were taken over but prior to
classification as private equity portfolio investments. Had these positions
continued to be marked to market a further loss of R195 million would have
been made. This loss has reduced the unrealised value of the Private Equity
portfolio. This position has improved marginally since December.
Six months ended Year ended
WesBank 31 December 30 June
%
R million 2008 2007 change 2008
Normalised earnings 159 420 (62) 573
Total assets 101 599 109 643 (7) 108 331
Bad debt ratio 2.7 1.5 2.09
ROE (%) 7 19 12
The combination of higher bad debts and slowing book growth in its local
lending businesses resulted in WesBank`s normalised earnings declining 62% to
R159 million compared to December 2007. Although on a rolling six months`
basis, compared to the six months to June 2008, profits improved 17%.
Normalised earnings do not include the R206 million loss incurred on the sale
of the Australia MotorOne Advances book.
WesBank`s domestic lending businesses grew non interest revenue 10% mainly
driven by annuity insurance revenues, WesBank`s Fleet business and the growth
of monthly administration fees, which were only introduced for business
originated from June 2007 onwards (introduction of the National Credit Act).
Operating expenses grew 3% year on year, however the cost to income and cost
to asset ratios in the business deteriorated marginally from 43.6% and 2.2%
to 44.6% and 2.3% respectively, more as a result of the declining advance
levels than high cost growth.
WesBank`s international operations include the Carlyle Finance operation in
the UK, and the WorldMark operation and the residual retail business in
Australia. Profits realised in the WorldMark operation offset the losses in
the lending business in both Australia and the UK, resulting in a net income
contribution of R15 million.
Six months Year
ended ended
Momentum 31 December 30 June
%
R million 2008 2007 change 2008
Normalised earnings 740 913 (19) 2 004
New business 32 810 27 236 20 65 338
Value of new business 331 291 14 596
(restated)
ROE (%) 23 31 30
Momentum`s normalised earnings declined 19% to R740 million for the six
months ended 31 December 2008, mainly due to the significant drop in equity
markets during the period. Despite the decline in earnings, a solid return on
equity of 23% was achieved.
Approximately 65% of Momentum`s operating profit is exposed to equity market
performance through asset based fees, which declined significantly in line
with equity market weakness. New business growth remained strong despite the
economic environment with the new business margin increasing from 2.1% to
2.2% in the period. Collaboration with FNB continued to show good earnings
growth, however growth in new business was more subdued in line with the
underlying trend in retail banking products.
Investment income on shareholders` assets benefited from higher average
interest rates and higher levels of cash. The embedded value has declined 6%
since 30 June 2008 to R15.1 billion due to the impact of equity market
weakness on future profitability, and the reduction in the directors`
valuations of asset management subsidiaries in line with the decline in the
assets managed by these businesses.
Relative contributions
The relative contribution to the Group`s continuing operations earnings mix
and growth rates from types of income (retail, investment and corporate
banking and insurance) and business unit is shown in the table below:
Six months ended
31 December
% %
R million 2008 contribution 2007 contribution
Retail banking
FNB Retail 680 1 274
FNB Africa 320 249
WesBank (58) 214
942 21 1 737 29
Corporate banking
FNB Corporate 294 226
FNB Commercial 1 137 989
WesBank 217 206
1 648 36 1 421 24
Investment banking
RMB 1 399 31 1 753 29
Insurance
Momentum 740 16 913 15
Other
FirstRand and (313) (243)
dividend paid on non
cumulative non
redeemable
preference shares
Banking Group 160 372
Support
(153) (4) 129 3
Normalised earnings 4 576 100 5 953 100
Year ended
30 June
R million % change 2008
Retail banking
FNB Retail 2 040
FNB Africa 218
WesBank 499
(46) 2 757
Corporate banking
FNB Corporate 477
FNB Commercial 2 137
WesBank 355
16 2 969
Investment banking
RMB (20) 3 008
Insurance
Momentum (19) 2 004
Other
FirstRand and dividend paid on non (420)
cumulative non redeemable preference
shares
Banking Group Support 80
>100 (340)
Normalised earnings (23) 10 398
Strategic Issues
FirstRand believes its key medium term priorities going forward are to ensure
a robust financial position, a strong balance sheet and reduced earnings
volatility.
The Group`s capital strategy is to manage capital within a range, however
given the current uncertainty in markets and the potential for further
external shocks in the macro environment, the Group prefers to be at the top
of the range in the short to medium term. This is particularly important as
risk migrates from the retail portfolios to the corporate and commercial
portfolios.
In formulating its funding and liquidity strategy, and as part of the current
de-risking process on the international portfolios, the Group has eliminated
all roll over risk on the international balance sheet. Domestically the Group
continues to lengthen the book and build up liquidity buffers.
FirstRand believes that the formalisation and determination of risk appetite
is one of the key strategic issues in banking, particularly given the current
environment. The high level objectives are to:
- maintain a mix of businesses, business activities, income streams and risk
exposures which will ensure that the Group will not pierce minimum regulatory
capital levels under conditions of severe stress;
- maintain its desired credit rating and counterparty status; and
- preserve capital and limit earnings volatility within acceptable levels
under all economic and market conditions to avoid loss of confidence or
adverse reputational impacts.
FirstRand has enhanced its process for setting risk appetite which includes
the following principles:
- the balance sheet of FirstRand Bank Limited ("FRB") and FirstRand Bank
Holdings Limited ("FRBH") must not be excessively geared ie economic risk
should be backed with Tier 1 capital;
- sources of income must be widely diversified across business entities,
products, market segments, investments, financial and commodity markets and
regions;
- off balance sheet exposures should be limited relative to own capital and
funding base;
- risk transfer should be about true risk transfer and not
accounting/regulatory arbitrage;
- the potential impact of severe downturn and stress conditions must be
identified, measured, quantified, understood and contained in accordance with
capital preservation and earnings volatility parameters;
- concentration in risky asset classes must be avoided;
- sources of funding must be diversified; and
- sufficient buffers must be held for capital and liquidity purposes.
Prospects
The macro outlook globally is expected to deteriorate further. The world is
experiencing the worst recession since World War II and expectations for
global growth have reduced from 2% to 0.5%. The macro scenario in South
Africa is likely to be less severe, however there will be some impact from
the credit crisis and domestic growth is expected to slow down further from
3% last year to 0.5% for 2009.
The South African banking system has been somewhat insulated from the global
financial crisis and whilst earnings pressure exists, capital levels have
remained robust. In general the local banks are well capitalised with access
to liquidity and funding, albeit at a higher cost.
Whilst South Africa is experiencing a severe cyclical downturn in asset
quality, there are no structural asset quality issues. Asset quality
deterioration and bad debts are in line with expectations given the cycle and
whilst interest rates have probably peaked, the deterioration in the credit
cycle will continue into 2009. It is likely that the international credit
crisis will impact on the real economy resulting in further job losses and
continued decline in asset values.
As such the South African consumer will remain under pressure despite the
recent easing of interest rates, and therefore volumes in the retail
businesses will continue to decline and bad debts to rise. In the Corporate
segment there is increased risk of default in certain counters, either those
exposed to the consumer cycle or those with leveraged balance sheets.
FirstRand believes it is well provided across its entire retail and wholesale
portfolios.
The Group`s local investment and corporate banking activities are expected to
remain resilient in the second six months which will mitigate to some extent
the strain in the local retail businesses. However, the significant profit
contributions that have recently been generated by realisations in the
private equity portfolio are unlikely to be repeated in the medium term and
the portfolios exposed to offshore markets, (although much smaller) will
continue to be impacted by continuing volatility.
The decline in equity markets, both locally and globally, has continued
beyond the period end, with no imminent prospects of a recovery in the
remainder of the current financial year. Momentum`s operating profit growth
is consequently expected to remain under pressure, whilst the income on
shareholders` assets could be negatively impacted by the expectation of lower
short term interest rates.
Against this very challenging backdrop, FirstRand continues to focus on
protecting its origination franchises and balance sheet to ensure it is
optimally positioned to take advantage of growth opportunities as they arise,
particularly as the negative credit cycle reverses. The Group has delivered a
track record of consistent growth and returns and is well positioned to
weather the turmoil in the economy.
Revised Trading statement
In the Group`s trading statement issued in December 2008, the Group stated
that proforma diluted normalised earnings for the year to 30 June 2009 would
be down between 0% and 15%.
The Group believes that the benefits to consumers of reducing interest rates
will only start to show in late 2009 or the early part of 2010 and economic
activity will remain subdued. Therefore, given its expectations of declining
asset growth and further acceleration of bad debts, combined with the
negative impact of reducing interest rates on capital and on the endowment
balances, earnings from its local retail franchises will remain under
pressure in the second half of the year. In addition both local and
international markets have experienced unprecedented volatility and the
resultant uncertainty is likely to continue.
The Group believes the performance for the 12 months to 30 June 2009 will be
similar to the first half. The financial information on which this revised
trading statement is based has not been reviewed and reported on by the
Group`s auditors.
Dividend Policy
A number of factors including International Financial Reporting Standards
("IFRS") and the meaningful contribution to group profit by the investment
bank continues to create earnings volatility. The Group does not wish to
expose the dividend to this volatility and therefore will focus on a
sustainable growth rate, in line with normalised earnings. This means that
the dividend cover may vary from year to year.
Basis of Presentation
FirstRand prepares its consolidated financial statements in accordance with
IFRS, including IAS 34: Interim Financial Reporting. The accounting policies
applied are consistent with those applied in preparation of the previous
financial statements.
The Group believes that normalised earnings more accurately reflect
operational performance. Headline earnings are adjusted to take into account
operational and accounting anomalies. Details of the nature of these
adjustments and reasons therefore can be found within this document.
A table reflecting the reallocation of prior period numbers and reasons
therefore can be found within this document.
Board changes
As stated in the annual report to shareholders, Mr GT Ferreira has retired as
chairman and director and has been replaced as chairman by Mr Laurie
Dippenaar with effect from 28 November 2008.
The following new appointments to the board have been advised on SENS:
Mr Johannes Petrus Burger (Financial director)
Mr Burger is currently Chief Financial Officer of the FirstRand Group and is
appointed to the board in terms of the JSE Listings Requirements. He is a
chartered accountant and has been with the FirstRand Group since 1986.
Mr Leon Crouse (Non executive director)
Mr Crouse is a chartered accountant and has since July 2008 held the position
of Group Finance Director of Remgro Limited. He joined the Rembrandt Group in
1986 and was transferred to Switzerland where he was involved in the
establishment of Richemont. In 1993 he returned to South Africa as a founder
member of the Vodacom Group Executive team.
Mr Deepak Premnarayen (Non executive director)
Mr Premnarayen holds an Honours Degree in Economics and is chairman of the
ICS Group of Companies with its headquarters in Mumbai. The ICS Group is
involved in pioneering projects including public private partnerships, real
estate, asset management and property services.
Mr Premnarayen has played an important role in assisting FirstRand Bank to
establish its operations in India.
Dr Jan Hendrik van Greuning (Independent non executive director)
Dr van Greuning is a chartered accountant who prior to leaving South Africa
in 1994 served as head of South African Bank Supervision at the South African
Reserve Bank. He is currently affiliated to the World Bank where he acts as a
senior adviser to their Treasury Operations. He holds Doctorates in Economics
and in Accounting Science and has authored books on International Financial
Reporting Standards and Banking Risk. Dr van Greuning is based in Washington,
USA.
Mr Matthys Hendrik Visser (Non executive director)
Mr Visser is the Chief Executive Officer of Remgro Limited where he has
worked since 1980. He holds a BCom Honours Degree from the University of
Stellenbosch and is a chartered accountant.
The appointment of Mr Crouse was with effect from 16 September 2008 and was
approved by shareholders at the November 2008 annual general meeting.
The appointments of Messrs Burger and Premnarayen and Dr van Greuning are
effective from 1 January 2009, while the appointment of Mr Visser is
effective from 1 April 2009.
Interim dividend declaration
Ordinary shares
The following ordinary cash dividend was declared in respect of the period
ended 31 December 2008:
Six months ended
31 December
Cents per share 2008 2007
Interim (declared 9 March 2009) 34.00 44.25
* The last day to trade in FirstRand shares on a cum-dividend basis in
respect of the interim dividend will be Friday, 27 March 2009 and the first
day to trade ex-dividend will be Monday, 30 March 2009. The record date will
be Friday, 3 April 2009 and the payment date Monday, 6 April 2009. No
dematerialisation or rematerialisation of shares may be done during the
period Monday, 30 March 2009 and Friday, 3 April 2009, both days inclusive.
Preference shares
Dividends on the "B" preference shares are calculated at a rate of 68% of the
prime lending rate of banks. The following dividends have been declared for
payment:
"B" "B1"
Preference Preference
Cents per share 2009 2009
Period 28 August 2008 -
25 February 2009 477.77 477.77
AH Arnott
Company secretary
9 March 2009
CONSOLIDATED INCOME STATEMENT
Six months ended Year ended
31 December 30 June
R million 2008 2007 % change 2008
Interest and similar 32 311 27 677 17 55 009
income
Interest expense and (19 392) (15 246) 27 (31 830)
similar charges
Net interest income 12 919 12 431 4 23 179
before impairment of
advances
Impairment of (3 693) (1 625) >100 (5 064)
advances
Net interest income 9 226 10 806 (15) 18 115
after impairment of
advances
Non interest income 4 145 12 035 (66) 22 471
Net insurance premium 2 951 2 429 21 5 374
income
Net claims and (3 024) (2 715) 11 (5 530)
benefits paid
Decrease/(increase) 4 568 (2 985) >100 (701)
in value of
policyholder
liabilities
Income from 17 866 19 570 (9) 39 729
operations
Operating expenses (13 080) (12 431) 5 (26 189)
Net income from 4 786 7 139 (33) 13 540
operations
Share of profit of 987 964 2 1 662
associates and joint
ventures
Profit before tax 5 773 8 103 (29) 15 202
Tax (653) (1 876) (65) (3 037)
Net profit from 5 120 6 227 (18) 12 165
continuing operations
Profit after tax from - 374 (100) 374
discontinued
operation
Profit after tax on - 494 (100) 494
disposal/unbundling
of discontinued
operation
Profit for the period 5 120 7 095 (28) 13 033
Attributable to:
Non cumulative non 230 194 19 409
redeemable preference
shares
Ordinary shareholders 4 306 6 283 (31) 11 309
Equity holders of 4 536 6 477 (30) 11 718
Group
Minority interest 584 618 (6) 1 315
Profit for the period 5 120 7 095 (28) 13 033
Earnings per share
(cents)
- Basic 82.8 121.3 (32) 218.2
- Diluted 82.6 118.4 (30) 214.1
CONSOLIDATED BALANCE SHEET
At 30
At 31 December June
R million 2008 2007 2008
ASSETS
Cash and short term funds 60 297 53 567 48 486
Derivative financial instruments 91 604 39 592 64 314
Advances 427 014 429 024 446 286
Investment securities and other 221 189 219 454 214 353
investments
Commodities 1 259 239 1 916
Accounts receivable 9 121 8 795 8 093
Investments in associates and joint 16 324 13 829 13 303
ventures
Property and equipment 9 582 6 761 8 859
Deferred tax asset 1 664 1 632 1 456
Intangible assets and deferred 5 284 4 409 4 497
acquisition costs
Investment properties 4 089 3 155 3 808
Policy loans on insurance contracts 211 188 212
Reinsurance assets 611 570 550
Tax asset 1 620 21 833
Non current asset held for sale - - 3 092
Total assets 849 869 781 236 820 058
EQUITY AND LIABILITIES
Liabilities
Deposits 490 153 481 870 488 423
Short trading positions 39 312 32 706 33 450
Derivative financial instruments 78 626 29 618 51 595
Creditors and accruals 13 136 11 779 13 051
Provisions 1 956 2 285 3 275
Tax liability 572 853 666
Post retirement benefit fund 1 829 1 946 1 980
liability
Deferred tax liability 4 701 5 814 5 372
Long term liabilities 14 163 11 249 13 941
Policyholder liabilities under 42 903 46 175 43 417
insurance contracts
Policyholder liabilities under 107 011 109 240 110 784
investment contracts
Liabilities arising to third parties 2 028 1 374 2 742
as a result of consolidating unit
trusts
Deferred revenue liability 298 265 296
Total liabilities 796 688 735 174 768 992
Equity
Capital and reserves attributable to
equity holders
Ordinary shares 52 51 52
Share premium 1 296 1 043 1 036
Reserves 44 834 38 533 43 082
46 182 39 627 44 170
Non cumulative non redeemable 4 519 4 519 4 519
preference shares
Capital and reserves attributable to 50 701 44 146 48 689
equity holders
Minority interest 2 480 1 916 2 377
Total equity 53 181 46 062 51 066
Total equity and liabilities 849 869 781 236 820 058
SUMMARISED CONSOLIDATED CASH FLOW STATEMENT
Six months Year
ended ended
31 December 30 June
R million 2008 2007 2008
Cash flows from operating
activities
Cash receipts from customers 47 336 34 390 75 755
Cash paid to customers, (34 684) (27 907) (56 279)
suppliers and employees
Dividends received 1 054 1 472 4 461
Dividends paid (2 220) (2 418) (4 523)
Net cash flows from operating 11 486 5 537 19 414
activities
Increase in income earning (7 953) (49 982) (63 226)
assets
Increase in deposits and other 13 455 57 564 55 647
liabilities
Net cash flows from operating 5 502 7 582 (7 579)
funds
Tax paid (1 807) (2 228) (4 715)
Net cash inflow from operating 15 181 10 891 7 120
activities
Cash flows from investment
activities
Purchase of property and (1 682) (1 156) (4 056)
equipment
Proceeds on disposal of property 405 38 320
and equipment
Purchase of investments (183) (426) (1 706)
properties
Proceeds on disposal of - 7 375
investment properties
(Purchase)/proceeds on disposal (43) (1 305) 182
of investments
Proceeds on disposal of 1 719 1 184 697
subsidiary
Acquisition of subsidiaries (102) (1 638) (1 526)
Acquisition of associates and (2 732) (2 317) (3 623)
joint ventures
Proceeds on disposal of 309 - 1 439
associates and joint ventures
Purchase of intangible assets (679) (60) (678)
Net cash outflow from investment (2 988) (5 673) (8 576)
activities
Cash flows from financing
activities
Proceeds from/(repayment of) (931) 1 712 3 129
long term borrowings
Net cash inflow/(outflow) from (931) 1 712 3 129
financing activities
Net increase in cash and cash 11 262 6 930 1 673
equivalents
Cash and cash equivalents at the 48 486 46 952 46 952
beginning of the period
Cash and cash equivalents at the 59 748 53 882 48 625
end of the period
Cash and cash equivalents sold* - (450) (695)
Cash and cash equivalents - 135 139
bought*
Effect of exchange rate changes 549 - 417
on cash and cash equivalents
Cash and cash equivalents at the 60 297 53 567 48 486
end of the period
* Cash and cash equivalents sold and bought relate to subsidiaries acquired
and sold during the period.
STATEMENT OF CHANGES IN EQUITY
for the six months ended 31 December
Share
capital and
Share Share share
R million capital premium premium
Balance as at 01 July 2007 51 2 338 2 389
Currency translation differences - - -
Movement in revaluation reserves - - -
Movement in other reserves - - -
Profit for the period - - -
Ordinary dividends - - -
Preference dividends - - -
Transfer (to)/from reserves - - -
Effective change of shareholding
in subsidiary - - -
Subsidiary sold/unbundled - - (1 201) (1 201)
Discovery
Non distributable reserves of - - -
associates
Reserves movements
transferred to the
income statement - - -
Consolidation of share trusts - (94) (94)
Balance as at 31 December 2007 51 1 043 1 094
Share
General Cash flow based Available-
risk hedge payment for-sale
R million reserve reserve reserve reserve
Balance as at 1 351 131 2 365 1 184
01 July 2007
Currency translation - - - -
differences
Movement in revaluation (41) 15 - 70
reserves
Movement in other - - 175 -
reserves
Profit for the period - - - -
Ordinary dividends - - - -
Preference dividends - - - -
Transfer (to)/from - - (93) -
reserves
Effective change of
shareholding
in subsidiary - - - -
Subsidiary - - (151) (426)
sold/unbundled -
Discovery
Non distributable - - - -
reserves of associates
Reserves movements
transferred to the
income statement - (19) - -
Consolidation of share - - - -
trusts
Balance as at 31 1 310 127 2 296 828
December 2007
Currency Other non
translation distributable Retained
R million reserve reserves earnings Reserves
Balance as at 01 July 2007 585 (588) 31 612 36 640
Currency translation (164) - - (164)
differences
Movement in revaluation - (125) - (81)
reserves
Movement in other reserves - 24 - 199
Profit for the period - - 6 283 6 283
Ordinary dividends - - (2 224) (2 224)
Preference dividends - - - -
Transfer (to)/from reserves - 52 41 -
Effective change of
shareholding
in subsidiary - - - -
Subsidiary sold/unbundled - - 385 (2 051) (2 243)
Discovery
Non distributable reserves of - 57 - 57
associates
Reserves movements transferred
to the
income statement - - - (19)
Consolidation of share trusts - (10) 95 85
Balance as at 31 December 2007 421 (205) 33 756 38 533
Capital and Total
reserves preference
attributable share-
to equity holders` Minority Total
R million holders funds interest equity
Balance as at 01 39 029 4 519 3 672 47 220
July 2007
Currency (164) - (22) (186)
translation
differences
Movement in (81) - 7 (74)
revaluation
reserves
Movement in other 199 - 8 207
reserves
Profit for the 6 283 194 618 7 095
period
Ordinary dividends (2 224) - (413) (2 637)
Preference - (194) - (194)
dividends
Transfer (to)/from - - - -
reserves
Effective change
of shareholding
in subsidiary - - 146 146
Subsidiary (3 444) - (2 100) (5 544)
sold/unbundled -
Discovery
Non distributable 57 - - 57
reserves of
associates
Reserves movements
transferred to the
income statement (19) - - (19)
Consolidation of (9) - - (9)
share trusts
Balance as at 31 39 627 4 519 1 916 46 062
December 2007
STATEMENT OF CHANGES IN EQUITY
for the six months ended 31 December
Share
capital
and
Share Share share
R million capital premium premium
Balance as at 01 July 2008 52 1 036 1 088
Currency translation - - -
differences
Movement in revaluation - - -
reserves
Movement in other reserves - - -
Profit for the period - - -
Ordinary dividends - - -
Preference dividends - - -
Effective change of
shareholding
in subsidiary - - -
Non distributable reserves of - - -
associates
Reserves movements
transferred to the
income statement - - -
Consolidation of share trusts - 260 260
Balance as at 31 December 52 1 296 1 348
2008
Share
General Cash flow based Available-
risk hedge payment for-sale
R million reserve reserve reserve reserve
Balance as at 01 July 8 602 2 248 1 107
2008
Currency translation - - - -
differences
Movement in revaluation - (93) - 432
reserves
Movement in other - - 60 -
reserves
Profit for the period - - - -
Ordinary dividends - - - -
Preference dividends - - - -
Effective change of
shareholding
in subsidiary - - - -
Non distributable - - - -
reserves of associates
Reserves movements
transferred to the
income statement - (850) - -
Consolidation of share - - - -
trusts
Balance as at 31 8 (341) 2 308 1 539
December 2008
Currency Other non
translation distributable Retained
R million reserve reserves earnings Reserves
Balance as at 1 365 (185) 37 937 43 082
01 July 2008
Currency 138 - - 138
translation
differences
Movement in - - - 339
revaluation
reserves
Movement in - (96) - (36)
other reserves
Profit for the - - 4 306 4 306
period
Ordinary - - (1 990) (1 990)
dividends
Preference - - - -
dividends
Effective
change of
shareholding
in subsidiary - - - -
Non - 121 (44) 77
distributable
reserves of
associates
Reserves
movements
transferred to
the
income - - - (850)
statement
Consolidation - - (232) (232)
of share
trusts
Balance as at 1 503 (160) 39 977 44 834
31 December
2008
Capital and Total
reserves preference
attributable share-
to equity holders` Minority Total
R million holders funds interest equity
Balance as at 01 44 170 4 519 2 377 51 066
July 2008
Currency 138 - 104 242
translation
differences
Movement in 339 - 19 358
revaluation
reserves
Movement in other (36) - (6) (42)
reserves
Profit for the 4 306 230 584 5 120
period
Ordinary dividends (1 990) - (565) (2 555)
Preference - (230) - (230)
dividends
Effective change
of shareholding
in subsidiary - - (44) (44)
Non distributable 77 - 11 88
reserves of
associates
Reserves movements
transferred to the
income statement (850) - - (850)
Consolidation of 28 - - 28
share trusts
Balance as at 31 46 182 4 519 2 480 53 181
December 2008
SOURCES OF NORMALISED EARNINGS FROM CONTINUING AND DISCONTINUED OPERATIONS
for the six months ended 31 December
2008 % composition 2007 % composition % change
R million
FNB 2 111 46 2 489 41 (15)
FNB Africa 320 7 249 4 29
RMB 1 399 31 1 753 29 (20)
WesBank 159 3 420 6 (62)
Momentum 588 13 800 13 (27)
- Momentum 444 690
- FNB Insurance 144 110
Group Support 312 7 485 8 (36)
- Banking Group 160 372
- Momentum 152 113
Group
FirstRand (83) (2) (49) (1) 69
Dividend
payment to non
cumulative non
redeemable
preference (230) (5) (194) (3) 19
shareholders
Normalised
earnings from
continuing 4 576 100 5 953 97 (23)
operations
Discovery - - 185 3 (100)
Normalised
earnings from
continuing and
discontinued
operations 4 576 100 6 138 100 (25)
DESCRIPTION OF NORMALISED EARNINGS
The Group believes normalised earnings more accurately reflect operational
performance. Headline earnings are adjusted to take into account non
operational and accounting anomalies.
These unaudited adjustments are consistent with those reported at 30 June
2008.
Share based payments and treasury shares: Consolidation of staff share
schemes
IFRS 2 - Share-based payments requires that all share based payments
transactions for goods or services received must be expensed with effect from
financial periods commencing on or after 1 January 2005. FirstRand hedges
itself against the price risk of the FirstRand share price in the various
staff share schemes. The staff schemes purchase FirstRand shares in the open
market to ensure the Group is not exposed to the increase in the FirstRand
share price. Consequently, the cost to FirstRand is the funding costs of the
purchases of FirstRand`s shares by the staff share trusts. These trusts are
consolidated and FirstRand shares held by the staff share schemes are treated
as treasury shares. For purposes of calculating the normalised earnings, the
consolidation entries are reversed and the Group shares held by the staff
share schemes are treated as issued to parties external to the Group.
The normalised adjustments:
- adds back the IFRS 2 charge; and
- adds back the treasury shares to equity.
Treasury shares: FirstRand shares held by policyholders
FirstRand shares held by Momentum Group are invested for the risk and reward
of its policyholders, not its shareholders, and consequently the Group`s
shareholders are not exposed to the fair value changes on these shares. In
terms of IAS 32, FirstRand Limited shares held by Momentum Group on behalf of
policyholders are deemed to be treasury shares for accounting purposes. The
corresponding movement in the policyholder liabilities is, however, not
eliminated, resulting in a mismatch in the overall equity and income
statement of the Group.
Increases in the fair value of Group shares and dividends declared on these
shares increases the liability to policyholders. The increase in the
liability to policyholders is accounted for in the income statement. The
increase in assets held to match the liability position is eliminated. For
purposes of calculating the normalised earnings, the adjustments described
above are reversed and the Group shares held on behalf of policyholders are
treated as issued to parties external to the Group.
REALLOCATION OF PRIOR YEAR NUMBERS
Amount as Amount
previously as
R million stated restated Difference Explanation
31 December 2007
Balance sheet
Advances 412 364 429 024 16 660 Change in
classification
to align with
industry
practice and
underlying
nature of
instruments.
Investment
securities
and other 236 114 219 454 (16 660) As above
investments
Deposits 478 854 481 870 3 016 As above
Short trading 34 194 32 706 (1 488) As above
positions
Derivative 31 146 29 618 (1 528) As above
financial
instruments
Income statement
Decrease/ (2 942) (2 985) (43) Fair value
(increase)in adjustment to
value of financial
policyholder liabilities
liabilities reallocated to
decrease/
(increase) in
value of
policyholder
liabilities
income to ensure
consistent
disclosure.
Fair value
adjustment to
financial (43) - 43 As above
liabilities
Web address: www.firstrand.co.za
DIRECTORS
LL Dippenaar (Chairman), PK Harris (CEO), VW Bartlett, JP Burger, DJA Craig
(British), L Crouse, PM Goss, Dr NN Gwagwa, G Moloi, AP Nkuna, SE Nxasana, AT
Nzimande, D Premnarayen (Indian), KB Schoeman, KC Shubane, RK Store, BJ van
der Ross, Dr JH van Greuning, Dr F van Zyl Slabbert.
SECRETARY
AH Arnott
REGISTERED OFFICE
4th Floor, 4 Merchant Place
1 Fredman Drive, Sandton, 2196
POSTAL ADDRESS
PO Box 786273, Sandton, 2146
Telephone : +27 11 282 1808
Telefax: +27 11 282 8088
Web address: www.firstrand.co.za
SPONSOR
RAND MERCHANT BANK (a division of FirstRand Bank Limited)
Date: 10/03/2009 08:30:02 Produced by the JSE SENS Department.
The SENS service is an information dissemination service administered by the
JSE Limited (`JSE`). The JSE does not, whether expressly, tacitly or
implicitly, represent, warrant or in any way guarantee the truth, accuracy or
completeness of the information published on SENS. The JSE, their officers,
employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature,
howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
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