| Tue 31 Jul 2001, 0:00 | | Nedcor Investment Bank - Interim Report |
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Nedcor Investment Bank Holdings Limited
(Incorporated in the Republic of South Africa)
(Reg No 1963/003972/06)
Interim report for the six months ended 30 June 2001
- Headline earnings up 20% to R376 million
- Headline earnings per share up 18%
- Return on average equity 25%
- Expense-to-income ratio down to 32%
Financial highlights
Unaudited Audited
6 months ended Year ended
30 June % 31 December
2001 2000 change 2000
Selected ratios
Return on average
equity (%) 24,5 25,3 (3) 23,3
Return on average
Banks Act risk-
adjusted assets (%) 4,3 4,3 - 3,8
Non-interest
revenue to
total income (%) 77,5 75,0 3 71,9
Expense-to-
income ratio (%) 32,1 36,3 12 35,4
Capital adequacy
Shareholders'
funds (Rm) 3 373 2 840 19 3 203
Total assets (Rm) 28 053 22 679 24 25 171
Group capital
adequacy ratio (%) 12,0 13,5 (11) 13,5
Share statistics
Headline earnings
per share (cents) 23,4 19,8 18 38,6
Diluted headline
earnings per share
(cents) 22,3 18,6 20 36,8
Weighted average
number of
shares (m) 1 609 1 583 2 1 591
Shares in
issue (m) 1 610 1 598 1 1 608
Share price
(cents) 300 320 (6) 270
Market capitalisation
(Rbn) 4,8 5,1 (5) 4,3
Group income statement
Unaudited Audited
6 months ended Year ended
30 June 31 December
2001 2000 % 2000
Rm Rm change Rm
Interest income 1 257 1 185 6 2 465
Interest expense 1 102 1 033 (7) 2 133
Net interest income 155 152 2 332
Non-interest revenue 535 457 17 850
Operating income 690 609 13 1 182
Specific and general
provisions 22 10 (116) 35
Net income 668 599 11 1 147
Operating
expenditure 221 221 (0) 419
Net operating
income 447 378 18 728
Income from
associated companies 1 6 (84) 17
Net capital profit on
disposal and
restructuring of
businesses - - - 13
Net income before
taxation 448 384 16 758
Taxation 72 71 (1) 77
Income attributable
to shareholders 376 313 20 681
Headline earnings
reconciliation
Income attributable
to shareholders 376 313 20 681
Less: Net capital
profit on disposal
and restructuring
of businesses - - - (13)
Taxation: exceptional
items - - - (53)
Headline earnings 376 313 20 615
Group balance sheet
Unaudited Audited
6 months ended Year ended
30 June 31 December
2001 2000 2000
Rm Rm Rm
Assets
Cash and short-term funds 4 312 1 028 1 668
Other short-term securities 1 646 1 948 1 794
Government and public sector
securities 2 314 3 075 2 498
Advances and other accounts 18 604 15 489 18 088
Associated companies 37 26 58
Other investments 1 073 1 005 975
Property and equipment 67 99 81
Customers' indebtedness for
acceptances - 9 9
Total assets 28 053 22 679 25 171
Equity and liabilities
Shareholders' funds 3 373 2 840 3 203
Long-term debt 2 2 1
Deposit, current and
other accounts 24 678 19 828 21 958
Liabilities under acceptances - 9 9
Capital, reserves and liabilities 28 053 22 679 25 171
consolidated statement of changes in equity
Non-
Ordinary distri- Distri-
share Share butable butable
capital premium reserves reserves Total
Rm Rm Rm Rm Rm
Balance as
at 1 January
2000 16 398 16 2 105 2 535
Issue of new
share capital 9 9
Transfers (3) 3 -
Currency translation
and other adjustments 1 (9) (8)
Attributable earnings 313 313
Dividend - cash election (9) (9)
Balance as
at 30 June
2000 16 407 14 2 403 2 840
Issue of
new share
capital 27 27
Currency
translation
and other
adjustments (3) (28) (31)
Attributable earnings 367 367
Balance
as at 31
December 2000 16 434 11 2 742 3 203
Issue of new
share capital 4 4
Currency translation
and other
adjustments 12 (14) (2)
Attributable earnings 376 376
Dividend - cash (208) (208)
Balance as
at 30 June
2001 16 438 23 2 896 3 373
Consolidated cash flow statement
Unaudited Audited
6 months ended Year ended
30 June 31 December
2001 2000 2000
Rm Rm Rm
Cash flows from operating
activities 478 398 817
Cash received from clients 1 729 1 611 3 248
Cash paid to clients,
employees and suppliers (1 316) (1 246) (2 529)
Dividends received on investments 65 33 98
Changes in working funds 2 512 340 565
Taxation paid (70) (71) (48)
Net cash utilised in
investment activities (92) (436) (419)
Net cash utilised by
financing activities (184) (8) (52)
Net cash generated 2 644 223 863
Cash and short-term funds at
beginning of period 1 668 805 805
Cash and short-term funds
at end of period 4 312 1 028 1 668
Comparative figures are restated, where necessary, to afford a proper
comparison. Percentages are calculated using actual numbers.
Commentary
The business environment for the period to 30 June 2001 remained
challenging, both in South Africa and internationally. Domestically,
economic momentum has been lost due to the slower growth in manufactured
goods and weaker agricultural conditions. There are also signs that consumer
spending is starting to falter after a positive 2000. The economic
environment worsened as the slowdown in the US economy intensified, and
international equity markets came under further pressure. Increased risk
aversion among investors reduced capital flows to emerging markets and kept
the US dollar strong against most other currencies.
Through its primary focus on its core activities and niche skills, Nedcor
Investment Bank Limited ("NIB") reported headline earnings growth of 20% to
R376 million and headline earnings per share growth of 18% to 23 cents per
share, despite these weak economic conditions. Earnings per share were
diluted by the issuing of ordinary shares during the first six months.
Structured and Project Finance, Treasury and Capital Account all produced
strong performances, with Advisory Services continuing to show sound
improvement.
The return on average equity achieved was 25% (2000: 25%). Operating margins
continued to strengthen, resulting in an improved ratio of operating
expenses to total income of 32% (2000: 36%).
As at 30 June 2001 shareholders' funds amounted to R3,4 billion. The group
consolidated capital adequacy ratio of 12,0%, compliant with the new Banks
Act regulations, exceeds
the 10% capital adequacy requirement that is effective from 1 October 2001.
Balance sheet growth for the year has resulted in part from a temporary
higher level of money market activity.
In addition to improvements in operating margins and earnings for the
period, a number of longer-term strategic milestones were achieved:
- The foreign currency component of NIB's earnings grew to 36% (2000: 24%),
with a significant contribution coming from Capital Account and improved
contributions from Structured and Project Finance, and Multi-Manager. This
growth is expected to continue, consistent with our ongoing strategic
objective.
- Certain directly held private equity investments were moved into focused
investment funds. NIB participates in the management companies responsible
for these funds.
- Structured and Project Finance's strong performance includes mandates for
projects totalling in excess of R1 billion.
- The strengthened Corporate Finance Unit continued to attract new business
and grow revenue, achieving favourable rankings among its industry peers.
Edward Nathan & Friedland ("ENF") continues to hold a leading position as
corporate law adviser, is positioning itself as a provider of
multidisciplinary services in selected niche areas, and is exploring
synergies with other advisory businesses in the Nedcor Group. This is
reflected in a number of joint mandates that have been signed.
- Significant progress was achieved in reducing the properties in possession
portfolio ("PIPs"), with a large proportion disposed of during the period.
- NIB sold its 20% interest in Galaxy to Old Mutual at a book cost of R20
million in June 2001.
Review of divisional operations
Advisory Services
A general slowdown in corporate activity in the first six months has
resulted in difficult conditions in the corporate finance market. Despite
this, the Corporate Finance Unit and ENF have made progress through their
strong respective skill bases in growing client base and revenues.
In spite of the depressed merger and acquisition market, ENF advised on
major transactions, including merger and unbundling initiatives in the
mining, steel, empowerment, media and resource sectors. In addition to ENF's
core activities, good progress has been made in positioning it to service
chosen niches, including corporate governance, sports and environmental law.
Considerable advancement has been made in the area of cooperation between
NIB Corporate Finance and ENF. Joint mandates have been performed for
clients, which include Allied Electronics Corporation Limited, Mutual &
Federal Insurance Company Limited and Sycom Property Fund.
The recent Ernst & Young merger and acquisition survey ranked NIB third
among financial advisers in the category of number of transactions advised.
Capital Account
NIB continued pursuing opportunities in optimising the risk and return from
Capital Account, which manages shareholders' funds on a ringfenced, fully
costed, marginal-contribution basis. The capital structure of NIB's foreign
operations has been increased by the retention of foreign earnings. Emphasis
continues to be placed by all business units on growing NIB's foreign
earnings base. Foreign shareholders' funds continue to be employed and
actively managed offshore in a manner that optimises the contribution
thereof to the group, and provide a potential source of funding for suitable
investing and business opportunities. NIB's Namibian operation has been
restructured and recapitalised, with the joint involvement of the
International Finance Corporation and two prominent Namibian empowerment
partners.
The deployment of shareholders' funds domestically has been optimised in
terms of asset allocations and return on assets.
For the purposes of segmental analysis the following wholly owned activities
have been incorporated under Capital Account.
NIB Quantitative Asset Management ("Quants")
Despite depressed markets, Quants' indexed assets under management continue
to grow steadily, albeit off a small base. As the asset management industry
continues to consolidate, various inorganic alternatives are currently being
reviewed.
NIB Multi-Manager ("NIBi")
NIBi continues to grow its assets under management (R7,5 billion), a
significant portion of which is internationally managed by NIB's foreign
operations.
Property Investments
The value of PIPs has been reduced over the six-month period from R467
million to R254 million. The commitment to dispose of the remaining balance
of PIPs within the medium term remains a priority.
Private Equity Investments
Market conditions continue to be difficult, evidenced not only by a
deterioration in market values but also by an inability to realise
investments according to original exit strategies. As a consequence, the
carrying values of certain investments were written down by a net
R17 million against non-interest revenue.
A strategy of creating focused investment funds that involve coinvestors has
been implemented, resulting in the formation of the Treacle Fund (a
technology fund) and the NIB-MDM Fund (a general small-capitalisation
company fund) to be launched, with capital of R255 million and R105 million
respectively. NIB's small-capitalisation portfolio was sold into the NIB-MDM
Fund and the Treacle Fund made its first major investment of R25 million in
Datacentrix Limited. A third fund, namely the Transformation Fund (an
infrastructure fund), is planned to be launched in the next six months. NIB
participates in the management companies of these funds.
Property Finance
The market has slowed down, with the book size increasing only marginally
this financial year. This slowdown is in line with the division's policy of
writing quality business, sometimes at the expense of growth, particularly
in times of market weakness.
The outlook for property remains neutral, and caution is being exercised due
to large quantities of new lettable space coming on stream in areas such as
Sandton. The surplus of lettable space was forecast some time ago with the
result that, for the past 18 months, very little untenanted development has
been financed by NIB.
Structured and Project Finance
During the first six months of the year the division experienced increased
demand for funding and a number of transactions have been concluded. The
Project Finance team continues to be expanded in line with NIB's intention
to place greater emphasis on its limited-recourse funding and advisory
activity. New financing mechanisms are currently being researched to satisfy
clients' needs for tailored solutions to financial requirements. Mandates
completed by the Project Finance team on a limited-recourse basis include
acquisition funding for Harmony Limited and funding to develop a waste
disposal plant for a major corporate. NIB has also been appointed as agent
and trustee of the N4 Platinum Toll Road.
Structured Finance continues to expand internationally, receiving a number
of mandates that have been concluded in Namibia.
Treasury
The first half of 2001 was a challenging period for Treasury, with volatile
trading conditions and the rand and equity markets under pressure. In
contrast, the strong bond and money markets helped to underpin earnings.
These conditions are expected to prevail in the foreseeable future.
The business unit continues to explore opportunities in the structured-
product and corporate bond market. Enhanced risk management capabilities are
now fully operational through an arrangement with Nedcor Group Treasury Risk
Control, resulting in additional cost savings from a more efficient systems
and administration environment.
Strategic Alliances
NIB Securities (Pty) Limited ("NIBSec")
The volatility and negative sentiment in equity markets continue to have an
adverse effect on industry turnover and volumes. While industry brokerage
margins have been significantly reduced, NIBSec, as a result of its low-cost
structure, is positioned to sustain itself through these adverse trading
conditions.
Syfrets Trust Limited
The merger of the KwaZulu-Natal fiduciary practices of Deloitte & Touche and
NIB was successfully completed during May. The business continues to perform
satisfactorily.
Franklin Templeton NIB Asset Management (Pty) Limited ("FTNIBAM")
The first half of the year was typified by volatile equity markets, during
which period FTNIBAM's investment performance was satisfactory. New business
volumes remain subdued, particularly in unit trusts where investors are
defensively seeking to invest offshore or in guaranteed products. FTNIBAM
has benefited from new business flows into the offshore retail and private
client businesses.
Accounting policies and presentation
The interim consolidated financial statements are prepared in accordance
with `AC127 - Interim Financial Reporting'. The accounting policies applied
in the preparation of these interim consolidated financial statements are
consistent with those used in the annual financial statements for the year
ended 31 December 2000.
Directors
Having reached retirement age, Mr GH Bulterman stepped down as a director
with effect from 20 June 2001. We are most grateful for his valuable
contribution since the formation of the company.
Strate
NIB is scheduled to move to the STRATE system during August and September
2001. Dematerialisation will start on 27 August, with electronic trading
commencing on 17 September and the first electronic settlement taking place
on 24 September. From 17 September 2001 no paper scrip will be accepted for
settlement and therefore shareholders who have not yet entered the STRATE
environment should appoint a Central Securities Depository Participant as
soon as possible.
Dividends
No interim dividend has been declared, as NIB has an annual dividend payment
policy. Accordingly, the board will consider the declaration of a final
dividend for the full financial year in early 2002.
Prospects
The strategy of addressing the lack of liquidity in NIB shares remains a
priority.
Key drivers in the economic outlook for South Africa relate to foreign
capital flows and business confidence. These would be materially affected by
a recovery in the US, which in turn should improve South Africa's exports
and act as a catalyst for government privatisation initiatives.
While investment banks are inherently subject to volatility in earnings, NIB
remains cautiously optimistic about its prospects for the remainder of the
year, given the markets within which it operates. Appropriate opportunities
complementary to NIB's current key focus areas, as well as the introduction
of additional functional activities, will continue to be pursued.
Prof MM Katz Dr IJ Botha
Chairperson Chief Executive
Johannesburg
31 July 2001
www.nib.co.za
Registered office
1 Newtown Avenue, Killarney, Johannesburg, 2193
Transfer secretaries
Mercantile Registrars Limited, 11 Diagonal Street, Johannesburg, 2001
Transfer Secretaries (Pty) Limited, PO Box 2401, Windhoek, Namibia
Directors
Prof MM Katz *(Chairperson), Dr IJ Botha *(Chief Executive), JR Bestbier*,
RG Cottrell, ML Davis, BE Davison, PG Joubert, PH Lane*, RCM Laubscher, CF
Liebenberg, E Molobi, SG Morris, Dr LA Porter, GF Richardson, WC Ross*, AA
Routledge, R van Wyk*
(*Executive Director)
Company Secretary
JS Eisenhammer
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