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Nedcor Investment Bank - Interim report for the six months ended 30 June 2002
Nedcor Investment Bank
Interim report for the six months ended 30 June 2002
* Headline earnings up 18% to R444 million
* Headline earnings per share up 16%
* Return on average equity 26%
* Expense-to-income ratio 32%
Commentary
After the events of late 2001 and the market volatility that followed, both the
economic and financial environments improved in early 2002. Internationally, a
strong recovery in the US in the first quarter raised hopes that the slowdown in
2001 would prove short-lived, and lower interest rates, fiscal stimulus and a
turn in the inventory cycle helped to improve sentiment and forecasts for higher
growth in the second half of the year. South Africa followed a similar path as
consumers shrugged off higher interest rates and prices caused by the rand`s
fall and exporters benefited from improved competitiveness. However, as the
second quarter progressed, global markets grew increasingly nervous on corporate
governance issues - in the wake of Enron/WorldCom - as well as fears that
structural problems would outweigh cyclical factors and cut short the recovery.
Nedcor Investment Bank Group (NIB) reported headline earnings growth of 18% to
R444 million and headline earnings per share growth of 16% to 27 cents per
share. The results benefited from the restructuring of a significant transaction
in Capital Account and from the marking to market of equities now classified as
trading investments. Earnings per share were diluted by the issuing of ordinary
shares during the first six months to shareholders who exercised their right to
subscribe for new shares in the company in terms of the dividend declared for
the year ended 2001 and paid in April this year.
The return on average equity achieved was 26% (2001: 25%). The 32% ratio of
operating expenses to total income (2001: 32%) reflects the continuation of the
efficiencies that have been evident in past results.
As at 30 June 2002 shareholders` funds amounted to R3,7 billion. The group
consolidated capital adequacy ratio of 11,8% (2001: 12,0%) exceeds the 10%
statutory capital adequacy requirement. On a total basis balance sheet levels
are consistent with those at the end of the last financial year, with the only
major movements coming from fluctuations in trading asset levels.
OFFER TO MINORITY SHAREHOLDERS
Nedcor has announced its intention to restructure the group following its
successful acquisition of BoE. Nedcor has further announced that, to facilitate
the restructuring process, it intends to make an offer to the minority
shareholders of NIB with a view to acquiring their shareholdings in NIB. Should
the offer to minority shareholders be successfully implemented, NIB will be
delisted. A subcommittee of the NIB board, consisting of independent non-
executive directors, has appointed Deutsche Securities SA as an independent
adviser in this regard. It is anticipated that the offer details will be
announced shortly.
REVIEW OF DIVISIONAL OPERATIONS
Advisory Services
Corporate Finance
Merger and acquisition activity levels in South Africa have been and are
expected to remain low for the year. During the first half of the year the
Corporate Finance team secured mandates from several new clients, including
Johnnic Communications, Ellerine Holdings, Allied Technologies, Murray &
Roberts, Namibian Breweries and African Legend. NIB has also been intensively
involved in the BoE transaction and the R4 billion Nedcor secondary capital bond
issue.
Edward Nathan & Friedland
Edward Nathan & Friedland (ENF) is continuing to pursue new infrastructure and
privatisation opportunities in South and southern Africa. Other areas of
activity over the past six months included the Nedcor/BoE deal, Pande Gas,
Swisscard, the rand enquiry, the World Summit on Sustainable Development, and
the Cricket World Cup 2003.
Capital Account
NIB continued to pursue opportunities in optimising the return from Capital
Account. NIB`s capital is managed so as to ensure that an appropriate balance
between local and offshore assets is achieved and to minimise short-term
earnings volatility, particularly in response to fluctuations in the rand.
During the last six months the capital structure of NIB`s foreign operations has
been increased by the deployment, with exchange control approval, of a further
R500 million, to be utilised to grow NIB`s offshore treasury capabilities.
NIB actively hedges the currency risk on its offshore capital and this hedging
strategy ensures that its earnings are protected from volatile exchange rate
fluctuations. The realised currency gain on NIB`s foreign capital structure for
the six months was R133 million (2001: R120 million).
NIB took advantage of favourable market conditions to restructure an existing
offshore asset and so release to income a net provision of R42 million, after
allowing for attributable costs. This asset was originally created from a
portfolio that included underperforming equity investments.
The contribution of R5 million (2001: R1 million) from strategic alliances has
been included under Capital Account results.
Equity Investments
It was decided to merge the entire equity portfolio of Corporate Equities and
Capital Account so as to combine all NIB private equity investments in one
portfolio. Simultaneously, in anticipation of the introduction of Statement of
Generally Accepted Accounting Practice AC133 - Financial Instruments:
Recognition and Measurement, this portfolio was split between trading
investments, strategic investments and mezzanine finance. The resulting trading
investments portfolio has now been fully marked to market.
NIBi (previously Multimanager)
The adverse investment markets placed pressure on fund inflows. The business
focus in the short term has been to enhance offshore distribution. In this
regard NIBi has been appointed as one of the product providers of Gerrards plc.
Three new products were launched during the last six months, namely an
international private asset swap, a euro money market fund and South Africa`s
first retail absolute return fund, entitled NIBi Horizon Inflation Beater.
Property
New business disbursements during the six months under review amounted to R1,4
billion, which is a satisfactory performance given the increase in interest
rates, the state of the market and stringent credit standards. The total size of
the book remained unchanged, notwithstanding the sale of a retail loan book with
a value of R382 million that did not fit within the institutional focus of the
division. Growth of R35 million in headline earnings is evidence of the widening
margin, lower provisioning and increased operating efficiencies of the division.
The property-in-possession portfolio was on average lower in the current year
than in the comparative period, but higher interest holding costs and reduced
marketability have negated any potential benefit.
Structured and Project Finance
Structured and Project Finance has shown impressive growth in headline earnings
in the first half of the year, despite competitive market conditions.
Domestically, and in Namibia, Structured Finance has experienced an increased
demand for funding. The business has continued to develop new debt origination
products during this period. From an international structured-finance
perspective, an attractive pipeline of projects involving exports to various
African countries has been built up, including a number of agricultural
commodity finance transactions. There is currently increased activity in the
project finance market in South Africa. The Project Finance team has been active
in bidding on major projects for the lead arranger and underwriter roles.
Regionally, our mandates to arrange funding for the concession agreements in
respect of the Komatipoort-Maputo railway and the Zambian railway system are
being finalised. NIB received the mandate as adviser and arranger on the Nacala
corridor project in Mozambique during the six-month period.
Treasury
The first half of 2002 was a challenging period for Treasury, with profitability
being negatively affected by the volatile trading conditions in both the rand
and equity markets. In particular, an abnormal government bond yield curve,
caused by a lack of liquidity on longer-dated gilts, and rapidly rising interest
rates negatively impacted on Treasury`s trading profits. During this volatile
period NIB did not create abnormal exposures.
Treasury continues to explore ways of expanding its product suite in the areas
of commodities, warrants, outsourcing and securitisation. An empowerment
structure for the quantitative asset management business is currently being
investigated.
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 2001.
As described under Equity Investments, certain investments have been
reclassified as trading and are now marked to market. Had this change in
classification been implemented in the prior year, the increase in 2001 earnings
would have been R6,4 million before tax and R4,5 million after tax. The current
year`s income statement benefit amounts to R31,3 million before tax and R21,9
million after tax. As this change in classification is not material to the 2001
results, no restatement of comparatives has been made.
Directors
Mr N Dennis, Chief Executive of Tiger Brands Limited, was appointed as Non-
executive Director on 11 March 2002. Mr SM Pityana (previously Director-General
of Foreign Affairs in the South African government) was appointed as Executive
Director of Development on 16 May 2002.
Dividends
NIB`s past practise has been not to pay an interim dividend. However, in view of
the anticipated offer to Nedcor Investment Bank Holdings Limited minority
shareholders by Nedcor Limited referred to above and the possible delisting of
NIB prior to this year-end, the board has deemed it appropriate that an interim
dividend should be paid to shareholders. Notice is hereby given that an interim
dividend of 9 cents per ordinary share has been declared in respect of the six
months ended 30 June 2002.
Trading in the STRATE environment requires settlement within five business days.
In accordance with the settlement procedures of STRATE, NIB has determined the
last day for trading to participate in the interim dividend to be Friday, 30
August 2002. The shares will commence trading ex dividend on Monday, 2 September
2002, and the record date will be Friday, 6 September 2002. Payment will be made
on Monday, 9 September 2002.
In the case of certificated shareholders the last day to register will be
Friday, 6 September 2002. Certificated shareholders may not dematerialise their
shares between Monday, 2 September 2002, and Friday, 6 September 2002. Dividend
cheques will be posted on Monday, 9 September 2002.
Prospects
Despite prevailing economic conditions, the board believes that NIB`s continued
growth for the balance of the year is sustainable as a result of ongoing
operating efficiencies and the benefits of future deal flow generated pursuant
to its efforts in the first six-month period.
Prof MM Katz, Chairperson Dr IJ Botha, Chief Executive
Johannesburg
23 July 2002
Financial highlights
Unaudited Audited
6 months year ended
ended
30 June Change 31 December
2002 2001 % 2001
Selected ratios
Return on average 25,8 24,5 5 23,1
equity (%)
Return on average 2,9 2,8 4 2,7
total assets (%)
Non-interest revenue 73,6 77,5 (5) 76,3
to total income (%)
Expense-to-income 31,8 32,1 1 32,6
ratio (%)
Capital adequacy
Shareholders` funds 3 703 3 362 10 3 311
(Rm)
Total assets (Rm) 30 213 28 058 8 30 242
Group capital adequacy 11,8 12,0 (2) 11,1
ratio (%)
Share statistics
Headline earnings per 27,0 23,4 16 46,1
share (cents)
Diluted headline 25,4 22,3 14 43,3
earnings per share
(cents)
Weighted average 1 645 1 609 2 1 610
number of shares (m)
Shares in issue (m) 1 697 1 610 5 1 612
Share price (cents) 385 300 28 300
Market capitalisation 6,5 4,8 35 4,8
(Rbn)
Group income statement
Unaudited Audited
6 months year ended
ended
30 June 31 December
2002 2001 Change 2001
Rm Rm % Rm
Interest income 1 503 1 257 20 2 546
Interest expense 1 295 1 102 17 2 223
Net interest income 208 155 34 323
Non-interest revenue 580 535 8 1 040
Operating income 788 690 14 1 363
Specific and general 27 22 19 40
provisions
Net income 761 668 14 1 323
Operating expenditure 251 221 13 445
Net operating income 510 447 14 878
before exceptional items
Share of amortised 25 - - -
goodwill of associates
Net income before taxation 485 447 9 878
Taxation 71 72 - 144
Net income after taxation 414 375 10 734
Attributable earnings of 5 1 365 9
associates
Income attributable to 419 376 11 743
shareholders
Headline earnings
Headline earnings 444 376 18 743
After excluding
Share of amortised 25 - - -
goodwill of associates
Group balance sheet
Audited
Unaudited year
ended
30 June 31
December
2002 2001 2001
Rm Rm Rm
Assets
Cash and short-term funds 5 877 4 312 3 961
Other short-term securities 1 691 1 646 2 389
Government and public sector 2 546 2 314 3 689
securities
Advances and other accounts 18 486 18 609 18 624
Associated companies 37 37 61
Other investments 1 534 1 073 1 481
Property and equipment 42 67 37
Total assets 30 213 28 058 30 242
Equity and liabilities
Shareholders` funds 3 703 3 362 3 311
Long-term debt 2 2 2
Deposit, current and other 26 508 24 694 26 929
accounts
Capital, reserves and 30 213 28 058 30 242
liabilities
Consolidated statement of changes in equity
Non-
Ordinary distribu- Distribu-
share Share table table
capital premium reserves reserves Total
Rm Rm Rm Rm Rm
Balance as at 1 16 434 11 2 731 3 192
January 2001
Issue of new share 4 4
capital
Currency translation 12 (14) (2)
and other adjustments
Attributable earnings 376 376
Dividend - cash (208) (208)
Balance as at 30 June 16 438 23 2 885 3 362
2001
Issue of new share 5 5
capital
Share issue expenses (5) (5)
Redemption of (400) (400)
preference share
capital
Transfers 14 (14) -
Currency translation (29) 11 (18)
and other adjustments
Attributable earnings 367 367
Balance as at 31 16 38 8 3 249 3 311
December 2001
Issue of new share 1 248 249
capital
Currency translation 9 (36) (27)
and other adjustments
Attributable earnings 419 419
Dividend - cash (249) (249)
Balance as at 30 June 17 286 17 3 383 3 703
2002
Consolidated cash flow statement
Unaudited Audited
6 months year
ended ended
30 June 31
December
2002 2001 2001
Rm Rm Rm
Cash flows from operating 513 478 941
activities
Cash receipts from 1 994 1 729 3 475
clients
Cash payments to (1 540) (1 316) (2 654)
clients,staff and
suppliers
Dividends received on 59 65 120
investments
Changes in working funds 1 578 2 512 2 486
Taxation paid (87) (70) (49)
Net cash utilised in (64) (92) (478)
investment activities
Net cash utilised by (24) (184) (607)
financing activities
Net cash generated 1 916 2 644 2 293
Cash and short-term funds 3 961 1 668 1 668
at beginning of period
Cash and short-term funds 5 877 4 312 3 961
at end of period
Segmental analysis of headline earnings
Unaudited Audited
6 months year
ended ended
30 June 31
December
2002 2001 Change 2001
Rm Rm % Rm
By major business activity
Advisory Services 10 16 (38) 36
Capital Account 237 174 36 378
NIBi 6 5 20 19
Equity Investments 9 17 (47) (24)
Property 37 2 - 36
Structured and Project 123 83 48 143
Finance
Treasury 22 79 (72) 155
444 376 18 743
By geographic source
Domestic earnings 220 178 24 400
Return on Investment in 133 120 11 172
Offshore Structure
International earnings 91 78 17 171
444 376 18 743
Comparative figures are restated, where necessary, to afford a proper
comparison. Percentages are calculated using actual numbers.
hard thinking. flawless execution. tangible results.
www.nib.co.za
Nedcor Investment Bank Holdings Limited
(Incorporated in the Republic of South Africa)
(Reg No 1963/003972/06)
Share code: NIB ISIN code: ZAE0000019030
Registered office
1 Newtown Avenue, Killarney, Johannesburg, 2193
Transfer secretaries
Computershare Investor Services 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, N Dennis, PG Joubert, PH Lane*, RCM Laubscher,
CF Liebenberg, E Molobi, SG Morris, PF Nhleko, SM Pityana*, Dr LA Porter, GF
Richardson, WC Ross*, AA Routledge, R van Wyk (*Executive Director)
Company Secretary
JS Eisenhammer
Date: 24/07/2002 08:16:15 AM Produced by the JSE SENS Department
