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FirstRand Limited - Results For the year ended 30 June 2002
FirstRand
Financial Imagineering
Another year of sustained excellence
Results
For the year ended 30 June 2002
www.firstrand.co.za
Group at a glance
The FirstRand Group comprises a number of independent operating divisions. These
divisions are grouped and managed on a cluster basis which ensures appropriate
collaboration between divisions operating in the same market segment.
Central to the FirstRand strategy is the image and reputation of its operating
divisions and their respective brands.
The FirstRand mission statement is to passionately build and nurture the most
compelling range of financial service brands in the business.
The divisions, their brands and the clusters to which they belong are presented
below:
Retail cluster
First National Bank retail banking division incorporates the branch network and
all basic and transactional banking product offerings to the consumer market.
First National Bank Home Loans is the primary mortgage lending operation in the
retail consumer market.
WesBank is a full service provider of instalment credit finance to the retail
and corporate market.
e-Bucks.com is the internet banking operation incorporating full retail internet
banking functionality and the Banking Group`s customer appreciation programme.
OUTsurance offers direct short-term insurance products. FirstLink offers
insurance broking services to retail and medium corporate clients.
First National Bank of Namibia, Botswana and Swaziland comprise the Banking
Group`s regional offering. They provide a broad range of retail and medium
corporate transactional and lending banking products to their regional client
bases.
Wealth Cluster
Ansbacher (South Africa) provides a holistic wealth management offering to high
net worth individuals, focused on personalised banking, advisory and portfolio
management services.
Origin, the merchant bank for individuals, is focused on the provision of
differentiated banking and investment products to the mass affluent market.
Momentum Life develops and markets investment and risk products that create and
preserve wealth in the middle to upper-income market.
Momentum MultiManagers is a multi-management asset management business servicing
institutional and retail clients in South Africa and internationally.
Corporate cluster
Rand Merchant Bank, the Banking Group`s investment banking operation provides a
broad range of corporate finance, treasury, structured finance and private
equity services to predominantly large corporates, government and parastatals.
FNB Corporate provides a broad range of transactional, lending and basic banking
products to the mid and large corporate markets, government and parastatals.
The centralised treasury is responsible for the liquidity, funding and interest
rate management of the Banking Group.
FirstRand Asset Management is a global asset management group offering a
complete range of domestic and international products to institutional and
retail clients.
Momentum Employee Benefits offers insurance benefits, consulting,
administration, risk and investment solutions to the corporate and union market.
Central Cluster
Represents the interest, dividends and net rentals earned on Momentum Group`s
shareholders` assets.
The Capital Centre owns and manages the Banking Group`s capital base.
FirstRand International is the holding company for the Banking Group`s
international operations - the company facilitates and enables the international
expansion and corporate governance of the international operations of the
Banking Group. The operating performances are included in the results of the
appropriate cluster.
Health cluster
Discovery focuses on making people healthier and protecting and enhancing their
lifestyles. Discovery products relate to healthcare funding and life assurance
and are all underpinned by the Vitality wellness programme.
International cluster
Ansbacher (United Kingdom) offers personalised holistic global wealth management
to high net worth individuals in international markets.
FirstRand
Financial Imagineering
1966/010753/06 Share code: FSR ISIN code: ZAE 000014973 ("FSR")
Introduction
This report relates to the consolidated financial results of FirstRand Limited
and its wholly owned subsidiaries, FirstRand Bank Holdings Limited (the Banking
Group) and Momentum Group Limited (the Insurance Group). Comprehensive reports
relating to these banking and insurance subsidiaries are included in this
circular and should be read in conjunction with this report.
Financial highlights
- Core operational headline earnings +21%
- Headline earnings including translation gains +28%
- Dividends per share +20%
- Total assets under management and administration R473 billion
This circular is available on our website at: www.firstrand.co.za
E-mail questions to: asktheCFO@firstrand.co.za
Statement of headline earnings and dividends
for the year ended 30 June
2002 2001 %
R million (audited) (audited) change
Banking Group 3 744 2 787 34
(refer page 11)
Core 3 196 2 580 24
operations
Foreign 548 207 >100
currency
translation gain
Insurance Group 1 038 943 10
(refer page 25)
Core 1 038 911 14
operations
Foreign - 32 (100)
currency
translation gain
FirstRand (61) (41) (49)
Limited
Headline 4 721 3 689 28
earnings
Less: Foreign (548) (239) >(100)
currency
translation gain
Core operational 4 173 3 450 21
headline
earnings
Dividends 1 552 1 293 20
declared (Rm)
Return on
average equity
(based on core
operational 25,6 25,2
headline
earnings) (%)
Return on 27,2 26,1
average equity
(based on
headline
earnings) (%)
Number of shares 5 445 5 445
in issue
(million)
Core operational 76,6 63,4 21
headline
earnings per
share (cents)
Headline 86,7 67,7 28
earnings per
share (cents)
Earnings per 82,8 65,7 26
share (cents)
Dividend per
share (cents)
Interim 13,50 11,25 20
Final 15,00 12,50 20
Total 28,50 23,75 20
Headline earnings reconciliation
for the year ended 30 June
2002 2001 %
R million (audited) (audited) change
Banking Group 3 740 2 780 35
Insurance Group 825 831 (1)
Goodwill 5 5 -
amortised -
intergroup
4 570 3 616 26
FirstRand (61) (41) (49)
Limited
Earnings 4 509 3 575 26
attributable to
ordinary
shareholders
Add: 58 36
Amortisation of
goodwill
Add: Impairment 210 -
of goodwill
Add: Loss on 4 -
disposal of
assets
Add: Effect of - 31
insurance
transitional tax
on prior years
Add: Exceptional
items in respect
of insurance
associated - 47
company
Less: Profit on (32) -
sale of
subsidiary
Less: Abnormal (28) -
profit on
release of
reserves
Headline 4 721 3 689 28
earnings
Balance sheet
at 30 June
2002 2001
R million (audited) (audited)
Assets
Banking operations 246 337 169 444
Cash and short- 24 784 10 133
term funds
Short-term 3 429 6 105
negotiable
securities
Liquid assets and 37 939 27 148
trading securities
Advances 175 161 123 343
Other investments 3 286 2 715
Non-recourse 1 738 -
investments
Insurance 76 461 70 510
operations
Funds on deposit 13 334 6 160
Government and 9 868 8 739
public authority
stocks
Debentures and 9 675 8 724
other loans
Policy loans 580 517
Equity investments 40 100 43 331
Investment 2 904 3 039
properties
Current assets 10 523 7 307
Loans 1 150 1 108
Investments in 1 736 978
associated
companies
Derivative 32 342 17 682
instruments
Deferred taxation 1 264 254
asset
Intangible assets 942 525
Retirement benefit - 126
asset
Property and 4 045 3 497
equipment
Total assets 374 800 271 431
liabilities and
shareholders`
equity
Deposits and 201 404 141 461
current accounts
Non-recourse 1 738 -
deposits
Current 13 790 12 482
liabilities
Provisions 926 782
Taxation 508 376
Derivative 37 215 24 058
instruments
Short trading 16 799 429
positions
Deferred taxation 2 288 1 526
liability
Post-retirement 1 211 1 124
medical liability
Long-term 4 229 3 835
liabilities
Life insurance 73 273 67 917
funds
Total liabilities 353 381 253 990
Outside 1 112 856
shareholders`
interests
Share capital and 9 585 9 595
share premium
Reserves 10 722 6 990
Total liabilities 374 800 271 431
and shareholders`
equity
Summarised cash flow statement
for the year ended 30 June
2002 2001
R million (audited) (audited)
Cash flows from
operating activities
Cash generated by 15 401 14 294
operations
Working capital (3 218) 4 546
changes
Cash inflow from 12 183 18 840
operations
Normal tax paid (1 412) (955)
Dividends paid (1 416) (1 157)
Net cash inflow from 9 355 16 728
operating activities
Net cash 11 988 (15 780)
inflow/(outflow) from
investment activities
Net cash 482 (827)
inflow/(outflow) from
financing activities
Net increase in cash 21 825 121
and cash equivalents
Cash and cash 16 293 16 100
equivalents at
beginning of year
Cash and cash - 72
equivalents acquired
Cash and cash 38 118 16 293
equivalents at end of
year
Statement of changes in equity
for the year ended 30 June
Non- Total
Share Share Retained distributable shareholders`
R million capital premium earnings reserves funds
Balance at 1
July 2000
As previously 56 9 539 4 517 257 14 369
stated
Changes in
accounting
policies
- Recognised
employer reserve
on
pension fund - - 156 - 156
surplus
- Leave pay - - (310) - (310)
provision
- Post- - - (248) - (248)
retirement
medical aid
liability
- Restatement of - - - (101) (101)
investment
reserve
Restated balance 56 9 539 4 115 156 13 866
at 1 July 2000
Currency - - - 141 141
translation
differences
Revaluation of - - - 128 128
investments
Non- - - - 28 28
distributable
reserves of
associated
companies
Movement in - - - 4 4
other reserves
Earnings - - 3 575 - 3 575
attributable to
shareholders
Dividends - - (1 157) - (1 157)
Balance at 30 56 9 539 6 533 457 16 585
June 2001
Balance at 1 56 9 539 6 533 457 16 585
July 2001
Preference share - (10) - - (10)
capital redeemed
Currency - - - 604 604
translation
differences
Revaluation of - - - 60 60
investments
Non- - - - 12 12
distributable
reserves of
associated
companies
Movement in - - - (37) (37)
other reserves
Earnings - - 4 509 - 4 509
attributable to
shareholders
Dividends - - (1 416) - (1 416)
Transfer - - (36) 36 -
(to)/from
reserves
Balance at 30 56 9 529 9 590 1 132 20 307
June 2002
Assets under management and administration
at 30 June
2002 2001
R million (audited) (audited)
Holding company
Banking Group 1 158 1 112
Insurance Group 281 774 189 886
On-balance sheet 190 196 182 454
Off-balance sheet assets 91 868 80 433
managed and administered
on behalf of clients
Total assets under 98 328 102 021
management and
administration
473 128 373 452
Sources of profit
for the year ended 30 June
R million 2002 % 2001 %
Retail cluster 1 761 42,2 1 577 45,7
Retail banking 803 19,2 631 18,3
Instalment 503 12,1 471 13,6
finance
African 288 6,9 231 6,7
subsidiaries
Mortgage lending 133 3,2 210 6,1
Short-term 34 0,8 34 1,0
insurance
Corporate 1 436 34,4 1 194 34,6
cluster
Investment 677 16,2 540 15,7
banking
Corporate 424 10,1 337 9,8
banking
Asset management 228 5,5 198 5,7
Employee 107 2,6 119 3,4
benefits
Wealth cluster 398 9,6 289 8,4
Individual 382 9,2 308 9,0
insurance
business
Private banking 16 0,4 (19) (0,6)
- domestic
Health cluster
Discovery 131 3,1 115 3,3
Holdings
International
Ansbacher UK 8 0,2 62 1,8
Capital 439 10,5 213 6,2
Capital centre - 310 7,4 83 2,4
Banking Group
Shareholders` 190 4,6 171 5,0
assets -
Insurance Group
FirstRand (61) (1,5) (41) (1,2)
Limited
Core operational 4 173 100,0 3 450 100,0
headline
earnings
Notes
1. Core operational headline earnings exclude foreign currency translation
gains.
2. Taxation relating to the Banking Group has been allocated across the bank`s
operating divisions on a pro rata basis.
Commentary
OPERATING ENVIRONMENT
The year under review will be remembered for the 11th September 2001 attack on
the World Trade Centre and the precipitous drop in the value of the Rand which
followed it. The Rand`s subsequent recovery was not sufficient to prevent a
substantial rise in domestic inflation and the Reserve Bank reacted by raising
its repo rate by a total of 300 basis points between January and June 2002.
International financial markets performed poorly. Equity prices were affected by
uncertainty regarding the recovery of the US economy and by major corporate
failures and declining credit ratings. Argentina defaulted on its debt
obligations and this created concerns regarding the potential for defaults in
other emerging markets. This led to increased uncertainty and market volatility.
Second tier banks in South Africa experienced liquidity pressures which were
further exacerbated when one of them was placed under curatorship. This led to a
flight by depositors to the larger financial institutions and a further
consolidation of the banking industry.
FINANCIAL OVERVIEW
FirstRand`s results demonstrate the resilience of its diversified earnings base.
The year was characterised by good organic top-line growth in banking and two
significant strategic acquisitions. The top-line growth was achieved by the
Banking Group without compromising the risk profile of its domestic lending
portfolio.
Shocks in the international debt markets led to losses being incurred on the
bank`s international lending portfolio. These were partially offset by good
profits in the trading divisions which benefited from the uncertainty and
volatility created by the self-same shocks.
The Insurance Group experienced a decline in new business growth but in spite of
this achieved robust double digit headline earnings growth. The devaluation of
the Rand gave rise to abnormally large translation gains. Gains of this
magnitude are not expected to be repeated in the coming year. The impact of
these gains on the results is highlighted in this report and is excluded from
core operational headline earnings.
FINANCIAL RESULTS
Consolidated headline earnings for the year to 30 June 2002 totalled R4 721
million (86,7 cents per share) representing an increase of 28% on the R3 689
million (67,7 cents per share) of the previous year. If the impact of the
foreign currency translation gain relating to integral businesses is removed,
core operational headline earnings grew by 21% to R4 173 million (76,6 cents per
share).
Attributable earnings, which include goodwill amortisation, asset impairment and
other exceptional items, increased by an excellent 26% to R4 509 million. The
rate of growth in core operational headline earnings in the second half of the
year was consistent with that announced at the interim stage.
The Banking Group increased headline earnings by 34% to R3 744 million. Headline
earnings of the Insurance Group, which exceeded R1 billion for the first time,
increased by 10% to R1 038 million.
Banking operations contributed 77% to core operational headline earnings with
insurance and asset management operations contributing the balance. Earnings
from international operations, which included another satisfactory year from the
African banking subsidiaries, represented 15% of core operational headline
earnings (2001: 18%).
A final dividend of 15 cents per share (2001: 12,5 cents per share) has been
declared bringing the total dividend for the year to 28,5 cents per share (2001:
23,75 cents per share). This represents an increase of 20%. Dividend cover based
on core operational headline earnings was retained at approximately 2,7 times.
The Group`s assets under management and administration now total R473 billion,
an increase of 27% on last year.
FirstRand`s return on average equity based on the disclosed headline earnings
was 27,2% (2001: 26,1%). Return on average equity using core operational
headline earnings was 25,6% (2001: 25,2%).
STRATEGIC INITIATIVES
During the year the Group was involved in a number of important strategic
initiatives.
These include:
- In July 2001, the acquisition of a further 32% in the international asset
manager, Jersey General Group (Ashburton) bringing the total holding to 87%.
- In January 2002, the sale of 40% of Futuregrowth, the Group`s specialist fund
manager, to WipCapital in a major black economic empowerment initiative.
- In February 2002, the successful merging of the back-office processing,
administration and management teams of Ansbacher South Africa and Origin to
eliminate duplicated cost infrastructures while retaining their distinct and
unique service offerings.
- The acquisition in March 2002 of the NBS HomeLoan book valued at R11,5
billion. The Group`s short-term insurer, OUTsurance, benefited from the
acquisition of the NBS insurance book relating to these properties.
- In May 2002, the taking on of the deposit client base and liabilities of
Saambou valued at R12,8 billion and as part of the same transaction the
acquisition of the homeloan book of R4,9 billion.
- The establishment with effect from June 2002 of Momentum International
MultiManagers through the consolidation of the local multi-manager, Momentum
Advisory Service with Ansbacher International MultiManagers in the United
Kingdom. The result is a focused multi-manager product house catering for both
local and international investors.
Other strategic interventions included the successful resolution of the Banking
Group`s risk concentration to the furniture and retail credit markets. Further
consolidation of back-office operations in the Retail Bank improved operating
efficiencies. Two major securitisation deals assisted the bank in its capital
optimisation programme.
In the Insurance Group, the resolution of the dispute between Discovery and the
Council for Medical Schemes regarding the level of fees and re-insurance
arrangements was strategically important. Both Momentum and Discovery Life
successfully launched new risk-related products.
OPERATING RESULTS OF SUBSIDIARIES
Banking Group
The Banking Group enjoyed another very successful year increasing its core
headline earnings by 24%. Advances growth of 42% was driven by good organic
growth in most business units, increased exposure to the international credit
market and two strategic acquisitions.
The retail deposit base increased by 42% as a result of the acquisition of the
Saambou deposit book, the flight by depositors to larger institutions and
focused marketing strategies. Average interest margins were maintained as a
result of the change in the mix of assets and the increase in the retail deposit
book. The capital centre benefited from the endowment effect of increasing
interest rates.
Local bad debt provisioning continued to show improving trends. Regrettably,
there were higher than expected losses on the international lending portfolio as
a result of a number of well publicised US corporate failures. These losses were
partly offset by excellent trading profits arising from market volatility.
Non-interest revenue reflected good growth in transactional income as the
Banking Group benefited from customer gains.
Expenses were well controlled. This, coupled with successful top-line growth
strategies, resulted in the overall operating expense ratio excluding all
foreign currency translation gains, reducing from 60,9% to 57,6%.
Insurance Group
The Insurance Group was able to demonstrate the robustness of its earnings in
the face of very difficult trading conditions.
Momentum Life`s individual business increased profits by a pleasing 24% against
a background of limited offshore investment capacity. The principal contributors
to growth were favourable mortality experience, sound expense management and a
meaningful increase in the contribution from the structured products division.
Momentum Employee Benefits` results were negatively impacted by AIDS- related
claims. Corrective pricing action has been taken. New business gains were
pleasing. Products designed to help pension funds cater for pensioner
liabilities were well received in the market place.
Earnings from asset management activities were flat. The investment team
improved its investment performance ranking relative to competitors. If
translation gains reflected in the prior year results are removed, the South
African asset management operations showed good growth in earnings while those
from international operations were flat as a result of declining international
equity prices and lower than anticipated inflows of new business.
Earnings from Discovery increased by an impressive 14% despite the effect of the
resolution reached with the Council for Medical Schemes. Members of the
Discovery medical scheme were not affected by the resolution as there was no
reduction in benefits, no increase in contributions and no impact on their
schemes credit rating. Discovery Life contributed positively to earnings in its
first full year of operations, while start-up losses in respect of the US-based
Destiny Health were in line with expectations.
The embedded value of the Insurance Group decreased by 10% to R9 532 million at
30 June 2002. This reflects the decline in the share price of Discovery Holdings
resulting from the impact of the agreement reached with the Council for Medical
Schemes and a downward adjustment in the directors` valuation of the Group`s
asset management companies. The profitability of new life business also
declined. This is a reflection of lower volumes of single premium business which
resulted from limitations on the Insurance Group`s ability to satisfy demand for
offshore investment products.
CAPITAL MANAGEMENT
At 30 June 2002, the consolidated capital adequacy ratio of the Banking Group
was 11,6% (2001: 11,5%) compared with the statutory requirement of 10%. The
shareholder surplus in the Insurance Group covered the statutory capital
adequacy requirements 2,4 times (2001: 2,4 times).
In October 2001 the South African Reserve Bank introduced significant changes in
the regulatory capital requirement of banks. Specifically, this involved an
increase in the capital adequacy ratio from 8% to a minimum of 10%.
The Financial Services Board has indicated that it intends to change the manner
in which the capital adequacy requirements of South African life insurance
companies is calculated. These proposed changes relate specifically to the
valuation of strategic investments, both listed and unlisted.
The bank`s capital requirements are influenced by the regulatory changes
referred to above and its strategy of selective acquisitions and strong top-line
growth. Strong new business growth of Discovery Life and Destiny Health is
expected to create a demand for additional capital.
The review of capital requirements is ongoing. This includes evaluating the
benefits of the further securitisation of the advances book, the better
utilisation of the Group`s international capital base and the raising of
international tier 2 capital. The Group is reviewing the way in which its
constituent parts are held in order to optimise capital utilisation.
CORPORATE SOCIAL RESPONSIBILITY
We are cognisant of the uniquely South African needs of our stakeholders and are
committed to playing a responsible role in the further development of our
nation. Our corporate social investment since the formation of FirstRand exceeds
R100 million. The extent of the voluntary service of many of our people in
working towards a better society is commendable.
The Group`s intellectual capital has allowed it to contribute in a meaningful
way to the development of much needed infrastructure in South Africa. We will
seek where possible, to engage Government in constructive debate about our role
in building a nation based on democracy, the free market system and the rule of
law.
DISCLOSURE PHILOSOPHY AND ACCOUNTING POLICIES
The Group has embraced the recommendations of the King II report on Corporate
Governance. A comprehensive review of Group practices has been undertaken. The
Group is committed to the highest standard of Corporate Governance, and in this
regard strives to provide reports which are timeous, accurate, consistent and
informative.
This profit statement has been prepared in compliance with the Listings
Requirements of the JSE Securities Exchange South Africa. The financial
statements to which this profit statement relates were audited by
PricewaterhouseCoopers Inc. A copy of their unqualified audit opinion is
available for inspection at the registered office of FirstRand Limited.
The accounting policies of the Group comply in all material respects with South
African Statements of Generally Accepted Accounting Practice and the Companies
Act of 1973.
The accounting policies are consistent with those applied during the previous
year, except for the effect of the revised accounting statement on employee
benefits (AC116). In addition, in anticipation of the adoption of AC 133,
unrealised gains on the insurance group`s shareholders` assets, previously
accounted for in the life fund, were credited directly to non-distributable
reserves.
CONTINGENT LIABILITIES
The Banking Group is party to legal proceedings in the normal course of
business. Appropriate provisions are made when losses are expected to
materialise.
STRATE
The dematerialisation of FirstRand shares under STRATE commenced on 29 October
2001. Trading for electronic settlement began on 19 November 2001. To date the
dematerialisation process has been successful and no material occurrences have
been reported.
On 29 September 2002 insurance cover provided by Lloyds of London to the
Dispossessed Members` Fund (DMF) terminates. The DMF was established to cover
losses or claims arising from any tainted certificates that may exist in the
market place. To avoid risk of tainted certificates, shareholders are advised to
dematerialise their shares and surrender all share certificates to their Central
Securities Depository Participants or broker prior to 29 September 2002.
PROSPECTS
At the time of the merger in April 1998 we said that it would take between three
to five years for the full benefits of the merger to be achieved. As we enter
the final lap of this five-year period, we look back with great satisfaction on
the progress made to date.
FirstRand operates in a challenging environment which is not helped by
regulatory uncertainty. Inevitably, our prospects are influenced by political
and economic events both locally and internationally.
Our strategic initiatives in the year ahead will continue to be outwardly
focused. Our internal structure, which is aimed at optimising collaboration
between business units, is starting to bear fruit. We have excellent people and
the successes in the past year have contributed to high staff morale. We will
continue to make selective strategic acquisitions of businesses to load our
infrastructure. The financial benefits of the two acquisitions made in the past
year will be reflected in earnings in the future.
We are satisfied with the quality of our earnings and are confident that
shareholders can continue to expect positive real growth from our well-
diversified earnings base.
DIVIDEND DECLARATION
The directors have declared a final dividend of 15 cents per ordinary share in
respect of the year ended 30 June 2002. The last day to trade in these shares on
a cum dividend basis will be 25 October 2002 and the first day to trade ex
dividend will be 28 October 2002. The record date will be 1 November 2002 and
the payment date is 4 November 2002. Please note that no dematerialisation or
rematerialisation can be done in the period 28 October 2002 to 1 November 2002,
both days inclusive.
On behalf of the directors
G T Ferreira L L Dippenaar
Chairman Chief Executive
Directors
G T Ferreira (Chairman), L L Dippenaar (CEO), B H Adams, V W Bartlett, D J A
Craig (British), D M Falck, P M Goss, P K Harris, M W King, S R Maharaj, M C
Ramaphosa, K C Shubane, B J van der Ross, Dr F van Zyl Slabbert, R A Williams
Transfer secretaries
Computershare Investment Services Limited
2nd Floor, Edura House
41 Fox Street
Johannesburg, 2001
Registered office
17th Floor, 1 Merchant Place
Cnr Fredman Drive and Rivonia Road
Sandton, 2196
Postal address
PO Box 786273, Sandton, 2146
Secretary
P F de Beer (FCIS)
FirstRand
Banking Group
Introduction
This report reflects the operating results and financial position of the banking
interests of the FirstRand Limited group of companies and should be read in
conjunction with the report on FirstRand Limited.
This circular is available on our website at: www.firstrand.co.za
E-mail questions to: asktheCFO@firstrand.co.za
Financial highlights
Excluding Including
Translation translation
Gains gains
% %
Attributable +24,1 +34,6
earnings
Headline earnings +23,9 +34,3
Return on average 25,1 27,3
equity
Cost to income 57,6 55,5
ratio
Advances growth 42,0 42,0
Income statement
for the year ended 30 June
2002 2001 %
R million (audited) (audited) change
Interest income 18 721 15 185 23,3
Interest expenditure (12 304) (9 770) 25,9
Net interest income 6 417 5 415 18,5
before impairment of
advances
Charge for bad and (1 705) (1 143) 49,2
doubtful debts
Net interest income 4 712 4 272 10,3
after impairment of
advances
Non-interest income 8 319 6 446 29,1
Other non-interest 7 771 6 239 24,6
income
Translational gains 548 207 >100,0
Net income from 13 031 10 718 21,6
operations
Operating (8 378) (7 180) 16,7
expenditure
Income from 4 653 3 538 31,5
operations
Share of earnings of 368 134 >100,0
associate companies
Income before 5 021 3 672 36,7
taxation
Indirect taxation (281) (225) 24,9
Income before direct 4 740 3 447 37,5
taxation
Direct taxation (818) (537) 52,3
Income after 3 922 2 910 34,8
taxation
Earnings (182) (131) 38,9
attributable to
outside shareholders
Earnings 3 740 2 779 34,6
attributable to
ordinary
shareholders
Less: Profit on sale (5) - >100,0
of subsidiaries
Add: Goodwill 9 8 12,5
Headline earnings 3 744 2 787 34,3
Balance sheet
at 30 June
2002 2001 %
R million (audited) (audited) change
ASSETS
Cash and short-term 24 643 10 133 >100,0
funds
Short-term 3 439 6 114 (43,8)
negotiable
securities
Liquid assets and 37 939 27 148 39,7
trading securities
Derivative 26 140 14 209 84,0
instruments
Retirement benefit - 126 (100,0)
asset
Advances 175 145 123 328 42,0
Non-recourse 1 738 - >100,0
investments
Debtors 3 270 2 412 35,6
Other investments 3 286 2 715 21,0
Investment in 1 169 496 >100,0
associated companies
Property and 3 412 2 911 17,2
equipment
Deferred taxation 1 253 246 >100,0
asset
Intangible assets 288 141 >100,0
TOTAL ASSETS 281 722 189 979 48,3
LIABILITIES AND
SHAREHOLDERS` FUNDS
Liabilities
Deposits and current 201 404 141 461 42,4
accounts
Non-recourse 1 738 - >100,0
deposits
Derivative 31 525 20 358 54,9
instruments
Short trading 16 799 429 >100,0
positions
Post-retirement 898 827 8,6
medical liability
Creditors and 7 015 8 979 (21,9)
accruals
Taxation 429 30 >100,0
Deferred taxation 1 931 1 524 26,7
liability
Long-term 3 217 3 304 (2,6)
liabilities
Provisions 831 691 20,3
Total liabilities 265 787 177 603 49,7
Outside 475 465 2,2
shareholders`
interest
Shareholders` funds
Ordinary share 106 106 -
capital
Share premium 1 332 1 332 -
Non-distributable 1 679 1 093 53,6
reserves
Distributable 12 343 9 380 31,6
reserves
Total shareholders` 15 460 11 911 29,8
funds
TOTAL LIABILITIES 281 722 189 979 48,3
AND SHAREHOLDERS`
FUNDS
CONTINGENCIES AND 27 284 17 928 52,2
COMMITMENTS
Environment
Economic
The twelve months under review were amongst the most dramatic in recent economic
history. This period was marked by inter-related events, including the terrorist
attacks of 11 September, the sharp decline and subsequent partial recovery of
the Rand, the reversal of the recent declining trend in South African inflation
and interest rates, corporate scandals in the United States, economic meltdown
in South America, political uncertainty in Zimbabwe and the re-rating of global
share values, amongst other factors.
Statutory and Regulatory
The year under review has seen the introduction or presentation for comment of
several Bills and Acts of parliament which have a direct or indirect effect on
the Banking Group. In particular, the Community Re-investment Bill, the Pension
Fund Act and the Black Empowerment Act have created challenges. These challenges
are being pro-actively dealt with by the banking industry, most recently through
the establishment of a joint working committee with Government.
Operational review
Against this economic background, which has resulted in some shocks, not least
the deterioration in international credit markets, the Banking Group has once
again produced excellent results, benefiting from a diversified earnings base.
Core operational headline earnings, which exclude translation gains, increased
by 23,9% from R2 580 to R3 196. Earnings attributable to ordinary shareholders
increased by 34,6% from R2 779 million to R3 740 million.
R million 2002 2001 % change
Earnings
attributable to
ordinary 3 740 2 779 34,6
shareholders
Less: Translation (548) (207) >100,0
gains
Core operational
earnings
attributable to 3 192 2 572 24,1
shareholders
Less: Profit on
sale of
subsidiaries (5) - >(100,0)
Add: Goodwill 9 8 12,5
Core operational
headline
earnings 3 196 2 580 23,9
Translation gains
The Banking Group recognises translation gains and losses on currency movements
in the income statement to the extent that the underlying operations are defined
as integral to those of the South African based business. Translation gains and
losses relating to independent operations are recognised directly in non-
distributable reserves. The year on year deterioration of the Rand has given
rise to abnormally large translation gains in the current financial year. For
the purposes of calculating core operational headline earnings, all translation
gains have been excluded.
R million 2002 2001 % change
Non-distributable 578 135 >100,0
reserves
Income statement 548 207 >100,0
- Translation gain
based on
interest 133 109 22,0
differentials
- Exceptional 415 98 >100,0
translation gain
Total translation 1 126 342 >100,0
gains
Interest income
The prime interest rate continued its declining trend into the beginning of the
current financial year, with a 0,5% reduction in September 2001, following the
1% reduction in June 2001. The trend was then negatively impacted by the decline
in the Rand and the consequent increase in inflation and 1% increases in prime
occurred in January, March and June of 2002. Prime ended the year at 16,0% from
13,5% at 30 June 2001. Although the Banking Group was positioned for a downward
interest trend at the end of the previous financial year, the book was
appropriately re-positioned when the view on interest rates was revised. Net
interest income, which increased by 18,5%, was positively influenced by:
- the volume impact on margins arising from the considerable organic growth in
both assets and deposit liabilities;
- the higher translation rate relating to non-Rand denominated interest income
following the fall in the Rand;
- the volume and margin impact of interest arising on the international
corporate debt portfolio (the Collateralised Debt Obligation structures);
- more active management of the Banking Group`s capital base; and
- a further increase in the Banking Group`s average capital base following the
retention of earnings in the previous financial year.
These positive factors outweighed the negatives, which included:
- reduced interest rates on the foreign capital base of the Banking Group;
- further pressure on asset margins; and
- reduced mismatch profit.
Interest margins
The gross interest margin based on average gross advances declined relative to
the previous year to 4,3% (2001: 4,7%). This percentage does not reflect the
true underlying margins as large advances books were added late in the financial
year distorting the averages. If these distortions are excluded, the core margin
remains consistent with the prior year despite continuing pressure on asset
margins throughout the period.
The Banking Group`s retail funding base, which has shown excellent growth as a
result of the consolidation of the tier two banks and market share growth,
benefited from a widening of deposit margins in the second half of the year. The
higher interest rates have increased demand for fixed rate products with better
margins, however competitive pressures in the South African market have
continued to put pressure on asset margins. Corporate margins continue to
reflect the pressure of a highly competitive and sophisticated market and once
again reflect a small decline.
Advances
Gross advances grew by 41,8% in the twelve months ended 30 June 2002:
R million 2002 2001 % change
Advances
before
deducting
interest in 180 235 127 463 41,4
suspense
Less: (725) (834) (13,1)
Interest in
suspense
Gross 179 510 126 629 41,8
advances
Less: (4 365) (3 301) 32,2
Provisions
Net advances 175 145 123 328 42,0
This growth has been significantly assisted by the acquisition of mortgage
advances from BOE Limited (NBS transaction) and Saambou Bank Holdings Limited
(Saambou transaction).
NBS transaction
With effect from 15 March 2002, the Banking Group acquired the mortgage assets
of NBS. The value of the book at the date of acquisition was R11,9 billion,
including non-performing advances with a value of R0,5 billion. Properties in
possession were excluded from the transaction.
The total purchase consideration was R11,5 billion in cash. In terms of the
agreement, the consideration was settled by an initial payment of R5,0 billion,
followed by a maximum of six further monthly instalments of approximately R1,0
billion each per month until the full purchase consideration is paid. At 30 June
2002, an amount of R3,7 billion was still outstanding. The outstanding amount
will be settled in full on or before 30 September 2002.
The Banking Group also acquired the related Home Owners` Comprehensive Insurance
portfolio from BoE. This business is managed by OUTsurance Insurance Company
Limited.
Saambou transaction
The Saambou transaction, with an effective date of 9 May 2002, involved the
acquisition of the entire share capital of Saambou Bank Limited (Saambou Bank).
The transaction was subject to the successful conclusion of a scheme of
arrangement in terms of section 311 of the Companies Act and other conditions,
in terms of which certain assets and liabilities of Saambou Bank would vest
under the sole control of the "Receivership for Scheme Creditors" (Receivership)
at a pre-determined price (the excluded assets). The remaining assets and
liabilities (the included assets) are the mortgage book of R4,9 billion, claims
against the Receivership of R7,9 billion (guaranteed by the South African
Reserve Bank) (SARB) and deposit liabilities of R12,8 billion. The included
assets and liabilities had a net asset value at 9 May 2002 of R1, and were
acquired for the same amount.
The Saambou Bank home loan book of R4,9 billion is conservatively provisioned,
taking into account the increased risk stemming from the period of the
curatorship.
Impact of the acquisitions
The following table sets out the income statement and balance sheet impact of
the Saambou and NBS acquisitions at 30 June 2002:
R million
Assets
Advances 15 912
- Saambou 4 945
- NBS 10 967
Claims against the
Receivership
(guaranteed by the SARB) 8 459
Non-performing loans 458
Less: provisions
- General provisions 218
- Specific provisions 290
Liabilities
Saambou deposits
- Retail 8 952
- Medium Corporate 1 534
Income statement
Interest turn 137
Charge for bad and doubtful (5)
debts
Net interest margin 132
Non interest income 7
139
Non interest expenditure (111)
Net income before taxation 28
The split between organic and non-organic growth in gross advances is set out
below:
Growth
R million 2002 %
Balance 2001 126 629 -
Organic growth
- Banking book 13 368 10,6
- Trading book 17 170 13,6
(includes CDO)
Acquisition
- Saambou 4 945 3,9
- NBS 10 967 8,6
Revaluation of
foreign currency
denominated 6 431 5,1
advances
Balance 2002 179 510 41,8
FNB HomeLoans has historically been under-represented in the South African
residential mortgage market. The acquisitions of the Saambou and NBS books
provide an excellent strategic fit and satisfies the objective of increasing
representation in this market segment. The transaction will increase the Banking
Group`s home loan market share from 10% to approximately 19%, which is closer to
the overall market share of the Banking Group in South Africa.
FNB HomeLoans has substantially improved its new business volumes, service
levels and non-performing loans position and is adequately resourced to absorb
the transactions. Hence, whilst organic growth has been successful, the
acquisitions provide a significant opportunity to FNB HomeLoans to leverage its
infrastructure.
A geographical analysis of the growth in gross advances is reflected below:
R million 2002 2001 % change
US Corporate 9 599 3 669 >100,0
debt
SA banking 150 248 105 622 42,3
operations
African 6 275 5 102 23,0
banking
operations
International 11 733 10 466 12,1
banking
operations
SA non- 1 655 1 770 (6,5)
banking
operations
Gross 179 510 126 629 41,8
advances
The Banking Group continued to grow its international advances portfolio and
the African subsidiaries also recorded a strong increase in advances. The growth
of both portfolios has been enhanced by the decline in the Rand against other
international currencies. The South African advances book also contains an
element of non-Rand denominated lending, which has been similarly affected. The
tables below show further analysis of asset growth adjusted for currency and by
product type.
The growth in gross advances has been achieved without sacrificing credit
quality.
A summarised analysis of the gross advances between Rand and non-Rand
denominated advances is set out below:
R million 2002 2001 % change
All non-Rand
denominated
advances $3 630 $2 858 27,0
@ exchange 10,31 8,06
rate
Non-Rand
denominated
advances 37 425 23 037 62,5
(Rand)
Rand 142 085 103 592 37,2
denominated
advances
Gross 179 510 126 629 41,8
advances
A summarised analysis of the gross advances per product category is set out
below:
R million
2002
2001
% change
Overdrafts
and managed
accounts
34 397
33 741
1,9
Card loans
3 942
3 096
27,3
Instalment
finance
21 592
18 722
15,3
Lease
payments
receivable
9 514
9 251
2,8
Home loans
48 568
24 612
97,3
Collateralise
d Debt
Obligation
(CDO)
9 599
3 669
>100,0
Other
advances
51 898
33 538
54,7
Gross
advances
179 510
126 629
41,8
FNB HomeLoans, Origin and WesBank continued their active pursuit of asset growth
which resulted in significant growth in their advances. WesBank is a market
leader in asset-based finance. Its strong alliances with product distributors
continue to contribute to new business growth.
Bad debt charge
Non-performing loans
The interest rate increases in the latter half of the financial year have not
had a discernible effect on the credit quality of the Banking Group`s domestic
advances book, which has continued to improve relative to the level of advances.
This is predominantly the result of the following factors:
the more conservative and scientific approach to credit approval adopted by
the Banking Group;
the conservative approach of both corporates and consumers to debt following
the interest rate spike of several years ago. This conservative approach is
reflected both in the overall level of debt, and the structuring of debt with a
greater fixed rate component; and
the impact of the most recent South African Government budget which released
approximately R15 billion into the economy, predominantly into the lower income
brackets, where borrowers are most likely to feel the pressure of increased
rates.
In particular, WesBank, FNB HomeLoans and FNB Retail Bank have continued to show
improvements in the credit quality of their respective credit books. The Banking
Group`s bad debt charge in respect of its exposure to the US corporate markets
disguises this improvement.
Non-performing loans:
R million 2002 2001 % change
Non- 5 305 4 423 19,9
performing
loans
Less: (1 014) (476) >100,0
Recoverable
amount
Net credit 4 291 3 947 8,7
exposure
Less: (1 266) (1 158) 9,3
Security
Less: (725) (834) (13,1)
Interest
suspended
Residual risk 2 300 1 955 17,6
Specific 2 300 1 955 17,6
provision
General 2 065 1 346 53,4
provision
Total 4 365 3 301 32,2
provisions
As a percentage of gross advances, non-performing loans, which include the CDO
portfolio, continue to decline, falling to 3,0% from 3,5% at 30 June 2001.
The Banking Group entered the micro-lending market in 1999. At 30 June 2002, the
advances book had grown to R245 million. Growth has been restricted by an
extremely cautious approach to credit. The majority of the exposure is either
secured or administered by way of corporate payroll deductions.
The Banking Group`s exposure to the problematic retail sector has been
satisfactorily resolved. Provisions are still held against the equity exposures,
on a mark to market basis.
Provisioning levels
% 2002 2001
Non-performing
loans as a
percentage
of gross advances 3,0 3,5
Specific provision
as a percentage
of non-performing 43,3 44,2
loans
Specific provision
as a percentage
of gross advances 1,3 1,5
General provision
as a percentage
of gross advances 1,2 1,1
Total provisions as
a percentage
of gross advances 2,5 2,6
Total provisions as
a percentage
of non-performing 82,3 74,6
loans
Total provisions as
a percentage
of residual risk 189,8 168,8
The total provision reflected in the balance sheet represents a conservative
2,5% of gross advances (June 2001: 2,6%). This decline mirrors the decrease in
non-performing loans as a percentage of group advances.
Advances analysis:
R million 2002 2001 % change
Advances
(excluding
US
Corporates)
Gross 169 911 122 960 38,2
advances
General 1 806 1 148 57,3
provision
Specific 2 044 1 955 4,6
provision
Charge for
bad and
doubtful 1 231 945 30,3
debts
US Corporates
Gross 9 599 3 669 >100,0
advances
General 259 198 30,8
provision
Specific 256 - >100,0
provision
Charge for
bad and
doubtful 474 198 >100,0
debts
The income statement charge for bad and doubtful debts reflects an increase of
49,2% relative to the prior period. This disappointing performance is a result
of higher than expected defaults experienced in the Banking Group`s exposures to
the US corporate market. These exposures, held through a Collateralised Debt
Obligation (CDO) structure, include Enron, K-Mart, WorldCom and Global Crossing
which defaulted during the current year. The increase in the bad debt charge
resulted in the Banking Group reflecting a deterioration in the bad debt charge
as a percentage of average gross advances to 1,11% (June 2001: 0,98%). Excluding
the bad debt losses on US corporate exposures, the charge to the income
statement would have been 0,95%, which is in line with the Banking Group`s
targeted loss ratios and a significant improvement on the previous year.
Non-performing loans and bad debt charge as a percentage of gross advances:
Non-interest income
R million 2002 2001 % change
Transactional 5 132 4 091 25,4
income
Trading 2 320 1 429 62,4
income
Investment 862 706 22,1
income
Other income 373 354 5,4
Total non- 8 687 6 580 32,0
interest
income
Less: Income (368) (134) >100
from
associates
Non-interest 8 319 6 446 29,1
income
Transactional income
Banking fee and commission income has grown by 21,1% as a result of steady
growth in revenue generating transaction volumes. The Retail Bank`s outward
focus is bearing fruit with strong growth in fee and commission income in its
books.
Trading income
High volatilities in the currency and interest rate markets created unusually
high transactional volumes, increased margins and provided good profit
opportunities to the Banking Group`s Treasury trading teams in contrast to the
comparative period.
R million 2002 2001 % change
Exchange 591 456 29,6
earnings
Exchange 433 128 >100,0
commissions
Treasury 642 413 55,4
operations
Other trading 106 225 (52,9)
income
Operational 1 772 1 222 45,0
trading
income
Translation 548 207 >100,0
gains
Trading 2 320 1 429 62,4
income
Other trading income includes the performance of Ansbacher UK, which incurred
trading losses on it`s US Corporate and emerging market debt portfolios.
Exchange earnings
The Banking Group recognises currency translation gains and losses on integral
operations when these emanate from the translation of foreign currency
denominated trading assets and advances. All other currency gains and losses are
credited to non-distributable reserves.
Investment income
R million 2002 2001 % change
Profit/(loss)
on
realisation
of
investment (14) 63 (>100,0)
banking
assets
Income from
associated
companies 368 134 >100,0
Investment
income on
assets
held against
employee
benefit
liabilities 71 82 (13,4)
Dividends 463 356 30,1
received
888 635 39,8
(Loss)/Profit
on sale of
plant
and equipment (26) 71 (>100,0)
Investment 862 706 22,1
income
Investment income includes gains and losses from the Banking Group`s Private
Equity businesses, in addition to traditional investment activities. However,
profits from the sale of Private Equity investments held through associates are
recognised in the income from associated companies line on the income statement.
An amount of R95 million in respect of such realisations is included in this
category in the current financial year. It is anticipated that private equity
profits will increasingly be recognised through the `Income from associates`
line.
Associates
R million 2002 2001 % change
McCarthy 72 - >100,0
Retail
Less: (72) - >100,0
Provision
OUTsurance 36 26 38,5
RMB Private 313 104 >100,0
Equity
Other 19 4 >100,0
Income from 368 134 >100,0
associates
McCarthy Retail
Included in `Income from associates` is before tax income from McCarthy Retail
of R72 million. The Banking Group acquired 48% of the ordinary share capital of
McCarthy Retail in September 2001 as part of a debt to equity swap. Although it
is not the intention of the Banking Group to hold McCarthy as a core investment,
it is unlikely that the investment will be disposed of before September 2002.
Consequently, in terms of accounting standards, it is required that the Banking
Group equity accounts for McCarthy. This investment will however be accounted
for separately in the income statement and balance sheet. In accordance with the
Banking Group`s accounting policy in respect of bought-in assets, profits and
losses on realisation of such assets will be accounted for in the income
statement and the investment will be valued at the market price ruling on the
last day of the financial period. In order to retain the investment at the
market value, a provision of R72 million has been raised against this investment
in the current period.
Other income
Other income includes property rentals and insurance brokerage.
Operating expenditure
R million 2002 2001 % change
Staff 4 412 4 017 9,8
expenditure
Depreciation 436 453 (3,8)
Goodwill 9 8 12,5
Other 3 521 2 702 30,3
expenditure
Total non- 8 378 7 180 16,7
interest
expenditure
Operating expenditure increased by 16,7% and was impacted by the NBS and Saambou
transactions, CDO operating expenditure and the impact of the decline in the
Rand, as set out below:
R million 2002 2001 % change
Core 7 876 6 966 13,1
operational
expenditure
Retrenchment - 137 (100,0)
costs
Saambou and
NBS
acquisition,
retention and 111 - >100,0
infrastructure
costs
CDO operating 62 - >100,0
cost
Goodwill and 9 77 (88,3)
other write-
offs
FNB HomeLoans
organic
acquisition 26 0 >100,0
costs
Currency 294 0 >100,0
translation
Total 8 378 7 180 16,7
operating
expenditure
The international operations of the Banking Group restricted growth in
expenditure to 12% in their reporting currencies. However, the considerable
weakening of the Rand during the current financial period resulted in a 43,2%
increase in Rand terms. The R294 million represents the increase in the
international operations costs attributable to the depreciation in the Rand. The
Rand depreciation also had a positive compensating effect on interest and non-
interest income.
Cost to income ratio
The cost to income ratio has continued to improve during the period under
review. Continued strict management of costs together with the growth in income
contributed to the improvement in the ratio from 60,9% to 57,6% (excluding
translation gains), and from 59,9% to 55,5% (including translation gains).
International Operations
Net income before taxation
R million 2002 2001 % change
FNB Botswana 252 180 40,0
FNB Namibia 235 195 20,5
FNB Swaziland 24 15 60,0
African 511 390 31,0
subsidiaries
FirstRand 378 359 5,3
International
Other 52 44 18,2
Total 941 793 18,7
International
earnings
The Banking Group`s international activities include:
- retail banking in other Southern African countries under the First National
Bank brand (the African subsidiaries);
- private banking and wealth management under the Ansbacher brand;
- vanilla and structured financing and investment through RMB International;
- investment banking services to resource-based businesses through RMB Resources
offices in the United Kingdom, Australia and the United States;
- corporate finance in Australia under RMB Corporate Finance;
- private equity investments in Australia and the United Kingdom; and
- development of trading markets in New Zealand, Australia and Singapore.
The increase in income before tax of FirstRand International was muted due to
the reduced endowment effect on capital following the steep decrease in dollar-
based interest rates and the higher than expected defaults on the CDO portfolio.
Divisional performances
The divisional performances of the Banking Group, before tax, can be analysed as
follows:
R million 2002 2001 % change
Retail 2 492 2 135 16,7
Cluster
Retail 1 080 818 32,0
Banking
Instalment 676 611 10,6
Finance
Mortgage 179 272 (34,2)
Lending
African 511 390 31,0
Subsidiaries
Insurance 46 44 4,5
Corporate 1 480 1 137 30,2
Cluster
Investment 910 700 30,0
Banking
Corporate 570 437 30,4
Banking
Wealth
Cluster
Private 21 (25) >100,0
Banking -
domestic
International
Wealth
Cluster
Private 11 80 (86,3)
Banking -
offshore
Capital 469 138 >100,0
Centre
4 473 3 465 29,1
Translation 548 207 >100,0
gain
Income before 5 021 3 672 36,7
tax
Retail Cluster
Retail Banking
FNB Retail showed strong growth in profitability despite a difficult trading
environment in the first half of the financial year, when low interest rates
caused a squeeze on liability margins. The growth in profits was achieved
largely as a result of a focus on increasing deposit balances and an increase in
active customers. Further centralisation of banking operations, which now
includes the rural branch network, led to cost reduction as a result of improved
processing efficiencies. A further refinement of credit processes is expected to
improve bad debt experiences in the future.
Metropolitan branches have delivered growth in new account openings. The Rural
branch network has also performed well, despite negative credit experience in
certain agricultural segments. Continued strong performance has come from an
expanding ATM network.
The acquisition of the Saambou deposits should deliver both revenue and a more
stable deposit base.
Instalment Finance
WesBank delivered a solid performance, despite declining vehicle sales, rising
inflation and increasing interest rates. Record levels of new business written
was achieved and market share increased across all its divisions.
Levels of arrears, bad debts and non-performing loans reduced due to the
continued attention to credit processes and excellent collections capability.
The collections competency is being increasingly used by other business units
across the Banking Group.
The business division benefited substantially from new business originated by
FNB Corporate. This improved both market penetration and profitability.
Substantial growth in the Personal Loans market was achieved under the CashPower
brand.
In the Deloitte & Touche survey of `Best Company to Work For`, WesBank, in its
first appearance in the survey, was included in the Top 10. WesBank was rated
first in the vehicle finance sector in the PricewaterhouseCoopers Inc. survey of
Strategic and Emerging Issues in South African Banking (the PwC Banking Survey)
for the 10th successive year.
Mortgage Lending
Profits declined in the current financial year due to a combination of new
business strain and FNB HomeTraders once-off profits of R56 million included in
the prior year. The key strategy of FNB HomeLoans for the current financial year
was to achieve growth organically and through acquisition. Both these strategies
were successful. An overall organic growth of 19%, together with the acquisition
of the home loan books of both NBS and Saambou, delivered an increase in
advances of 96,5%.
eBucks.com
The FirstRand Group`s e-commerce offering, eBucks.com, continues its rapid
growth. This business-to-consumer initiative that encompasses internet banking
and a customer appreciation programme, was launched in October 2000. Since its
launch, eBucks.com has attracted 370 000 customers, 90 000 of whom are FNB
Internet banking customers. Organic growth of 7 000 customers per month has been
steadily maintained since the launch.
The eBucks.com website currently processes R2 billion worth of transactions each
month and is showing promising growth.
Insurance
OUTsurance
OUTsurance posted strong results for the financial year ending 30 June 2002.
Gross premium income increased by 40% to R574 million (2001: R409 million)
driven by strong organic growth. Expenses, as a percentage of net premium
income, decreased from 38,9% to 31,8%.
OUTsurance`s claims ratio (claims dividend by premiums) is less than 60%, which
is well below the industry average of round 70%.
FirstLink
Revenue growth in the commercial segment grew by 14% despite unfavourable market
conditions as well as the change of brand to First Link. "First Platinum", the
new high net-worth personal lines product with many innovative extensions, was
successfully launched.
African Subsidiaries
The Banking Group`s African subsidiaries delivered strong operating
performances. This was characterised by good asset growth and continued low
provisioning.
Good non-interest revenue growth was experienced in all entities.
Corporate Cluster
Investment Banking
Rand Merchant Bank produced 30,0% growth in income, in a year characterised by
volatility and extremely difficult international markets. Special Projects
continued to be the largest profit contributor despite experiencing difficult
conditions in the US Corporate and Emerging debt markets. The market leading
FRESCO and WesBank securitisation transactions, the dominant position enjoyed in
concession based finance in South Africa and large Project Finance deals in
Africa have contributed to the year`s success.
Corporate Finance division also implemented a number of landmark transactions
despite volatile equity markets and weakening merger and acquisition activity.
Private Equity division grew its investments substantially and delivered stable
results in a market characterised by limited investment opportunities and low
levels of activity. Realisation opportunities were limited.
Treasury Trading positioned itself well, without any disproportionate increase
in risk, to take advantage of the opportunities presented by volatile and
illiquid markets.
Aligned with RMB`s drive to attract and retain the best intellectual capital, it
was ranked the top financial services business and second overall in the
Deloitte & Touche Human Capital "Best Company to Work For" competition.
Corporate Banking
In a very competitive environment, FNB Corporate has enjoyed a very successful
year, with a year on year growth in income of 30,4% to R570 million.
FNB Corporate is a major provider of transactional banking services and credit
facilities to large and medium sized corporates as well as financial and
government institutions. Strong client relationships enable it to expose clients
to the wider financial services offerings of the FirstRand Group and therefore
maximise intergroup collaboration. The Specialised Finance division was
established to provide a link between FNB Corporate and RMB.
FNB Corporate has progressed from 4th position in 1999 and in 2002 was rated the
number two Corporate Bank in the PwC Banking Survey.
Wealth Cluster
Private Banking - domestic
The FirstRand Banking Group`s local private banking operations comprise the
businesses of Ansbacher (South Africa) and Origin.
Ansbacher (South Africa)
This business enjoyed strong growth in the year under review, generating a pre-
tax profit of R8,6 million against a loss of R25 million in the previous
financial year. This is attributable to a continued focus on client acquisition,
cost consolidation and further growth in non-interest income.
Origin
Origin achieved targeted profits of R7,1 million during the financial year,
having recorded a loss of R5,2 million in the prior year. Advances grew by 38%
to R4,7 billion, with record volumes of new business processed.
Having lead the market with the introduction of the first debt consolidation
account, this loan product was significantly enhanced during the year to include
full transactional capability. This has not only added materially to new
business volumes but has also brought with it further profit generators in the
form of non-interest revenue.
In January 2002, a decision was taken to merge the back office processing,
administration and management teams of Ansbacher (South Africa) and Origin. The
distinct and successful service offerings provided to their individual market
segments by each entity remain intact. Benefits from the elimination of
duplicated cost infrastructures and the generation of new business through
effective cross selling are already evident.
The combined entity is well positioned to deliver further growth in
profitability in the current financial year.
Private Banking - international cluster
In terms of profitability, the Ansbacher Group had an extremely challenging year
with operating profit before tax declining. Ansbacher`s results were negatively
impacted by the unfavourable trends in world markets. The propriety trading
books of the central treasury suffered losses on US Corporate and Emerging
market debt instruments. Ansbacher`s Caribbean banking operations experienced a
decline in both interest margins and volumes in the aftermath of September 11,
2001.
The Ansbacher Group had a successful year in terms of strategic development.
Most important was the creation of Ansbacher Wealth, which will provide
investment services to its client base. Together with the Group`s existing
banking and fiduciary business, Ansbacher Wealth completes the range of services
necessary to successfully compete in the wealth management market.
The Ansbacher Group has had to devote a significant amount of management time
and resource to an issue which dates back to an operation established in the
Cayman Islands in 1971 by the Guinness Mahon (Ireland) Group and pre-dates its
acquisition by the Banking Group. The company, known as Guinness Mahon Cayman
Trust Company, was purchased some 17 years after its incorporation by the
Ansbacher Group in 1988, and renamed Ansbacher (Cayman) Limited (ACL). Due to
various revelations in the late 1990`s concerning payments to Irish politicians
made in the 1970`s and 1980`s and the use of offshore funds to facilitate such
payments, inspectors were appointed by the Irish High Court to investigate the
affairs of various companies, inter alia ACL, in September 1999.
The Report of the inspectors was published on 6 July 2002 and concluded that
there was some evidence to suggest that the business involving the Irish
clients, amongst other things, might have breached certain sections of the Irish
tax code. Based on independent advice received, the Banking Group cannot see a
basis upon which ACL may be assessed for Irish tax. To date, ACL has not been
contacted by the Irish tax authorities, but should any assessments be received,
they will be vigorously defended. The directors have further been advised that
any assessments would, in any event, be unenforceable and therefore no provision
for a liability has been made. No disclosure of the estimate of the financial
effect of possible assessments has been made, as such an estimate is
impracticable.
The Irish Minister of Justice has made an application to obtain reimbursement of
the costs of the enquiry of approximately _3,6 million (R36 million) against
ACL and has made further application to include six other parties in this
regard. The application is not expected to be heard until later this year, or
early next year. ACL has a number of compelling arguments against the points
raised in the application and therefore no provision for these costs is
considered necessary.
Capital Centre
The Capital Centre, which was negatively impacted in the prior year by levels of
provisioning, delivered a considerably better performance in the current year.
Aided by a higher average interest rate, and a larger capital base, growth has
been driven by the capital endowment effect. The current level of earnings sets
an acceptable base for the future profitability of the Centre.
Capital adequacy
The increase in the capital adequacy ratio to a minimum of 10% (from 8%) was
implemented on 1 October 2001 by the South African Reserve Bank (SARB). This
completed the first phase of the significant changes in the regulatory capital
requirements of banks proposed by the SARB.
The Banking Group continues to actively manage its capital structure to optimise
shareholder returns, while ensuring compliance with the new requirements. The
increased requirement does influence the ability of the bank to maintain its
superior return on capital.
The current capital ratios within the Banking Group are:
R million 2002 2001 % change
Tier 1 8,7 8,2
Tier 2 2,9 3,3
Total capital 11,6 11,5
Risk weighted 147 964 120 214 23,1
assets
Optimal capitalisation is a key driver of the Banking Group and is managed
accordingly. The Banking Group has implemented economic profit measurement and
allocates capital to align managerial behaviour more closely with the interests
of shareholders.
Accounting policies
The financial results of the Banking Group have been prepared on the historical-
cost basis, except for certain trading assets and liabilities which are carried
at fair value. The financial results comply in all material respects with South
African statements of Generally Accepted Accounting Practice (SA GAAP).
The accounting policies applied are consistent with those of the previous year,
except as set out below. Where necessary, comparative figures have been adjusted
to conform with changes in presentation in the current year.
Changes in Accounting Policy
The Banking Group has adopted the revised accounting statement on employee
benefits (AC116), which was effective for years commencing on or after 1 January
2001. This statement requires that assets, liabilities, income and expenditure
arising from employee obligations be reflected in the financial statements in
full in the period in which they are accrued. Previously, the Banking Group
accounted for employee benefits on a pay-as-you-go basis.
These changes have been applied retrospectively and the comparative amounts for
2001, as well as distributable reserves for 2000, have been restated. As a
consequence, the results of the Banking Group have been amended as set out
below:
R million 2002 2001 % change
Core
operational
headline
earnings
before change
in
accounting 3 217 2 587 24,4
policy
Employee (21) (7) >100,0
benefits
Core
operational
headline
earnings
after change
in
accounting 3 196 2 580 23,9
policy
The distributable reserves of the Banking Group have been affected as follows:
R million 2002 2001 2000
Closing
balance of
distributable 12 773 9 789 7 548
reserves
Employee (430) (409) (402)
benefits
Restated
closing
balance
of 12 343 9 380 7 146
distributable
reserves
Prospects
The changing statutory and regulatory environment is presenting challenges to
the Banking Group. These challenges are being actively managed by the banking
industry which has engaged Government in constructive debate on the industry`s
role.
The Banking Group remains cautious of further international shocks and its
impact on both local and global investment and credit markets.
The Banking Group previously indicated that the merger of the RMB and FNB
interests would take between three to five years for all the benefits to be
delivered. The fourth year saw the start of an outward focus and the results to
date have been very pleasing. As the Banking Group enters the fifth year, the
Board is confident that its growth strategy will continue to deliver superior
results for shareholders. The selective acquisition strategy commenced in the
latter part of the current financial year should contribute considerably in the
new year.
On behalf of the directors
G T Ferreira P K Harris
Chairman Chief Executive Officer
FirstRand Bank Holdings Limited
(Registration No 1971/009695/06)
Registered Office
6th Floor, 1 First Place, Bank City, Johannesburg, 2001
Momentum
Introduction
This report relates to the life insurance, health insurance and asset management
interests of the FirstRand Limited Group of Companies (the FirstRand Group) and
should be read in conjunction with the report on FirstRand Limited elsewhere in
this announcement. The consolidated figures in this report comprise the
operations of Momentum Group Limited divisions, associates and subsidiary
companies, including Momentum Life, Momentum International MultiManagers,
Momentum Employee Benefits, FirstRand Asset Management and the Discovery Group
of companies, collectively referred to as the Momentum Group.
Financial highlights
- Headline earnings exceed R1 billion for the first time
- Core operational headline earnings +14%
- Net positive flow of funds of R3,7 billion
- Group assets exceed R190 billion
This circular is available on our website at: www.momentum.co.za
E-mail questions to: asktheCFO@momentum.co.za
Income statement
for the year ended 30 June
2002 2001 %
R million (audited) (audited) Change
Group 848 772 10
operating
profit after
tax
Net premium 19 245 17 636
income
Individual 16 113 15 105
business and
employee
benefits
Health 3 132 2 531
insurance
Investment 5 787 4 747
income
Policyholder (17 393) (14 359)
benefits
Marketing and (2 530) (1 970)
administration
expenses
Individual (908) (773)
business and
employee
benefits
Discovery (1 280) (864)
Holdings
Asset (342) (333)
management
Commissions (934) (718)
Direct (604) (274)
taxation
Indirect (131) (122)
taxation
Realised and 2 879 5 005
unrealised
investment
surpluses
Earnings (108) (86)
attributable
to outside
shareholders
Transfer to (5 363) (9 087)
life fund
Investment 190 171 11
income on the
shareholders`
portfolio
Interest, 209 199
dividends and
net rentals
Direct (19) (28)
taxation on
investment
income
Group headline 1 038 943 10
earnings
Headline
earnings
reconciliation
Earnings 825 831 (1)
attributable
to
shareholders
Add: 54 34
Amortisation
of goodwill
Add: 210 -
Impairment of
goodwill
Add: Loss on 4 -
sale of assets
Add: - 47
Exceptional
items relating
to African
Life
Add: Effect of - 31
transitional
tax on prior
years
Less: Abnormal (28) -
profit on
release of
reserves
Less: Profit (27) -
on disposal of
subsidiary
shares
Group headline 1 038 943 10
earnings
Balance sheet
at 30 June
2002 2001
R million (audited) (audited)
ASSETS
Investment 83 412 74 906
assets
Funds on 13 403 6 212
deposit
Government and 9 868 8 739
public
authority
stocks
Debentures and 9 675 8 978
other loans
Policy loans 580 517
Equity 40 213 43 467
investments
Investment in 566 481
associated
companies
Derivative 6 203 3 473
instruments
Property 2 904 3 039
investments
Current assets 7 462 4 924
Deferred 11 8
taxation asset
Intangible 748 482
assets
Property and 636 588
equipment
Total assets 92 269 80 908
LIABILITIES
AND
SHAREHOLDERS`
FUNDS
Current 6 035 3 401
liabilities
Provisions 94 91
Taxation 78 345
Derivative 5 690 3 700
instruments
Deferred 357 2
taxation
liability
Post- 313 297
retirement
medical
liability
Long-term 1 990 1 105
liabilities
Life insurance 73 399 68 036
fund
Outside 603 374
shareholders`
interest
Share capital 3 710 3 557
and reserves
Total 92 269 80 908
liabilities
and
shareholders`
funds
Total assets 190 597 182 928
under
management and
administration
Review of group results
The Momentum Group performed satisfactorily during the year under review, with
group headline earnings exceeding R1 billion for the first time. Despite
difficult market conditions experienced by some business units, the diversity of
the group`s earnings base has enabled us to produce headline earnings growth of
10% for the year. This growth comprises an increase of 10% in group operating
profit after taxation, and an increase of 11% in the investment income on
shareholders` assets. Core operational group headline earnings, which excludes
foreign exchange translation gains, increased by 14%. The highlight of these
results was the 24% increase in operating profit after tax from Momentum`s
individual business.
Solid operational performance from most business units resulted in a credible
performance despite the difficult operating environment experienced during the
period under review. Volatile investment and currency markets, as well as an
increasingly challenging regulatory environment have affected overall group
performance. The limitations placed by the Reserve Bank on foreign portfolio
investments by insurers have had a negative impact on new individual life
business, specifically within Momentum`s target market. AIDS impacted negatively
on claims experience in our employee benefits business, resulting in a decline
in earnings from this area. The agreement reached between Discovery and the
Council for Medical Schemes with regard to administration fee and reinsurance
arrangements between Discovery and the Discovery Health Medical Scheme, has
dampened growth in the earnings and embedded value of Discovery.
GROUP OPERATING RESULTS
The following table shows the main components of the increase in group operating
profit after tax for the period:
2002 2001 %
Earnings Rm Rm change
source
Insurance 489 427 14,5
operations
Individual 382 308 24,0
business
Employee 107 119 (10,1)
benefits
Asset 228 230 (0,9)
management
operations
Discovery 131 115 13,9
Holdings
Group 848 772 9,8
operating
profit
Investment
income on
190 171 11,1
shareholders`
assets
Group 1 038 943 10,1
headline
earnings
Group core
operational
headline 1 038 911 13,9
earnings1
1 Represents group headline earnings excluding foreign currency translation
gains of R nil (2001: R32 million).
Insurance operations
Individual business
The individual business of the group generated an excellent increase in
operating profit after tax of 24% to R382 million. This growth resulted from a
number of factors, namely:
- Positive experience profits mainly with regard to mortality;
- Continued expense savings. The operating expenses of the individual business
increased by only 7% (excluding once-off retrenchment costs) over the past year
as a result of continued tight cost control. This trend is expected to continue
with the closure of our Great Westerford offices in Cape Town; and
- An outstanding performance from the business unit responsible for structured
corporate insurance products.
As mentioned in our interim results announcement, individual life single premium
new business has come under severe pressure, mainly as a result of the
limitations placed by the Reserve Bank on offshore fund investments by insurers.
Individual life single premiums declined by 23% compared to the prior year,
which is an improvement on the 30% decline reported at the half-year.
New individual life recurring premium business (excluding Discovery Life) has
shown marginal growth of 3% compared with the 2001 figures, once again an
improvement on the decline of 5% reported at the interim stage. This figure
excludes automatic premium increases. The reduction in new recurring investment
business resulting from the increased limitations on offshore investments, was
offset by an increase in the sales of new recurring risk business. In addition,
our Personal Offshore Portfolio product, utilising the individual offshore
allowance available to individuals, has been well received by the market, and
now contributes 16% of all new individual recurring premium business.
Momentum International Multi-Managers (MIMM) was formed by consolidating the
local multi-manager operation, Momentum Advisory Service, with Ansbacher
International Multi-Managers in the UK. The consolidated multi-manager operation
continued to benefit from the mandate it secured to manage institutional assets
of R5 billion. In addition, the recently launched international hedge funds
attracted significant new business inflows. MIMM now manages a total of R27,3
billion in assets, of which R11,6 billion are managed locally and R15,7 billion
managed in the UK. Of the R27,3 billion, 78% represents group assets managed,
with the remainder being third party funds.
Employee benefits
As reported in our interim results announcement, the operating profit of
Momentum Employee Benefits declined due to lower underwriting profits arising
from unfavourable experience in relation to AIDS-related risk claims. The
adverse claims experience was restricted to a few specific schemes.
Our strategy for managing this business has been revised. This includes a more
active approach to premium increases, and we are confident that we will restore
the previous profitability level of this portfolio.
New risk business premium income showed healthy growth of 32%. Particularly
impressive was the increase in new fee income of 160%. Much of this arose from
innovative solutions to clients` needs for funding post-retirement healthcare
liabilities and taking over pensioner liabilities from pension funds.
Asset management operations
The FirstRand Asset Management Group (FRAM), comprising RMB Asset Management
(RMBAM), RMB Investment Services, RMB Properties, 40% of Futuregrowth Asset
Management (Futuregrowth), FirstRand International Asset Management (FRIAM) and
87% of the Jersey General Group (JGG), maintained its contribution to the group
operating profit after tax. However, the comparative results for the year to 30
June 2001 include an amount of R31,7 million representing foreign exchange
translation gains, which are no longer accounted for in the income statement due
to a change in categorisation of FRIAM from an integral operation to an
independent foreign entity on 1 July 2001. On a comparable basis, the operating
profit after tax increased by 15%, indicating satisfactory results, especially
considering the volatility in equity and currency markets. In fact, the local
operations of FRAM reflected a 23% increase in operating profit after tax,
whilst there was a decline of 1% in operating profit after tax from offshore
operations, excluding the comparative translation gain.
With effect from 1 July 2001, an additional 32% was acquired in JGG, bringing
the total investment in JGG to 87%. JGG contributed assets under management of
R11,1 billion at 30 June 2002. The decline in international investment markets
has resulted in the group reassessing the carrying value of the goodwill arising
upon the acquisition of JGG. It was decided to charge an impairment of R210
million, in addition to the normal goodwill amortisation, against attributable
earnings during the current year. This brings the carrying value of our
investment in JGG in line with the current valuations of similar operations in
the UK fund management market.
As mentioned in the interim results announcement, an empowerment transaction was
concluded whereby 40% of Futuregrowth, the group`s specialist fund manager, was
sold to Wipcapital, the financial services division of Wiphold, with effect from
1 January 2002. Wipcapital has an option to increase this shareholding to 56,5%
after two years. As part of the empowerment transaction, a further 20% of
Futuregrowth has been earmarked for an employee incentive scheme, leaving the
FRAM group with a 40% shareholding.
FRAM`s assets under management totalled R142 billion at 30 June 2002 (30 June
2001: R155 billion), of which R88 billion (30 June 2001: R97 billion) are off-
balance sheet funds, with the balance being group on-balance sheet assets
managed. The assets managed by Futuregrowth are no longer included in FRAM`s
assets under management as the group now holds only 40% of Futuregrowth. The
comparative assets under management included on-balance sheet assets of R8,4
billion and off-balance sheet assets of R9 billion managed by Futuregrowth. The
investment performance of RMBAM has improved during the past year, with the RMB
Managed Fund`s one year performance moving up from 9th position at 30 June 2001
to 5th position at 30 June 2002, out of the ten largest asset managers in the
Alexander Forbes Global Large Manager Watch. In addition, unit trust performance
remains satisfactory, with RMB Unit Trusts being ranked in the top quartile
overall of the Plexus Survey of unit trust performance to June 2002.
Discovery Holdings
Discovery, in which the Momentum Group owns 63% (2001: 64%), again produced very
good results despite a challenging environment. Discovery`s headline earnings
per share increased by 14%, despite the financial effect of the resolution
reached with the Council for Medical Schemes. Discovery Life has contributed
positive earnings to the overall group results in its first full year of
operation, whilst the rand equivalent of the losses incurred by Destiny Health
in the US were in line with budget, despite the weaker rand.
The new business volumes of Discovery Health decreased by 10% to R1 869 million
(including Vitality), mainly due to the significant new business generated in
2001 following the demise of certain major competitors and the amnesty period`s
open enrolment. Discovery Life generated new annualised recurring premium income
of R264 million (2001: R94 million) in its first full year of operation. Destiny
Health continues to grow steadily, and generated new business of R206 million
(US$22,5 million).
Discovery`s embedded value increased by 5% to R3 312 million at 30 June 2002.
The agreement between Discovery and the Council regarding lower levels of
administration fees and reinsurance reduced the embedded value by R673 million.
Investment income on shareholders` assets
The investment income on shareholders` assets increased by 11,1% to R190
million. The two most significant factors affecting this growth in investment
income were:
In pursuit of the optimisation of capital, dividends of R300 million in excess
of the Momentum Group`s normal dividend policy were paid to FirstRand Limited
during the current year, with the FirstRand Banking Group reducing its dividend
by the same amount. This reduced the overall shareholders` assets, and the
corresponding investment income thereon. This brings the total dividends paid to
FirstRand by Momentum Group in excess of the group`s normalised dividend to R825
million since 2000, which has assisted the FirstRand Banking Group in increasing
its capital adequacy ratio; and
African Life, in which the group equity accounts its 33,4% stake, reported a
40% increase in headline earnings per share during the year to March 2002,
resulting in a positive effect on the investment income on shareholders` assets.
Shareholders` net assets at 30 June 2002 consisted of the following:
Actuarial value of 2002 2001
shareholders` net Rm Rm
assets
Strategic
subsidiary
investments1
- Discovery 1 777 2 691
Holdings (63%)
(2001: 64%)
- FirstRand Asset 1 603 1 845
Management
- Momentum Advisory
Service (72,5%)
(2001: 100%) 40 36
Shareholders`
portfolio
investments1
- African Life 557 525
(33%) (2001: 32%)
- Fixed interest 572 370
instruments
- Equities 132 139
- Properties 268 201
- Share trust and 589 914
subsidiary loans
- Cash and other 626 658
Total shareholders` 6 164 7 379
net assets
1 The income from strategic subsidiary investments is included in group
operating profit, whilst the income on the shareholders` portfolio investments
is reflected separately in headline earnings. The group`s policy is not to
include capital appreciation or depreciation on shareholders` assets in
earnings, but to rather account for these items directly in reserves.
The comparative figures in the table above have been adjusted upward from R7 149
million to R7 379 million by reversing the 2001 provision for dividends in line
with recent changes in accounting standards.
The total shareholders` net assets decreased by 16,5% from R7 379 million to R6
164 million, mainly as a result of the excess dividends declared, the 34%
decline in the Discovery share price between 30 June 2001 and 30 June 2002, and
the reduction in the directors` valuation of FirstRand Asset Management.
Capital adequacy
The excess of assets over liabilities of Momentum Group was R6 164 million at 30
June 2002. The capital adequacy requirements (CAR) of R2 543 million (2001: R3
024 million) were covered 2,4 times (2001: 2,4 times) by this excess. The more
efficient management of our smoothed-bonus portfolio and improved matching of
fixed liability portfolios, resulted in a 31% reduction in the CAR relating to
individual business.
The Financial Services Board (FSB) is in the process of formulating new rules
with regard to the calculation of the solvency requirements relating to life
insurers. These new rules include more conservative principles for the valuation
of strategic subsidiary investments. Momentum is confident that it will remain
in a financially sound position should the current draft proposals be
implemented.
Results of the embedded value calculation
The embedded value of the Momentum Group, representing the sum of the
shareholders` net assets and the present value of the expected future profits
arising from the existing in-force insurance business, totalled R9 532 million
at 30 June 2002 (2001: R10 536 million). The embedded value calculation includes
the Momentum Group`s 63% share of the market value of Discovery Holdings, as
well as the unlisted strategic subsidiary companies at directors` valuation.
The analysis of the main components of the group embedded value at 30 June 2002
is set out in the following table:
2002 2001
Embedded Rm Rm
value
Actuarial 6 164 7 379
value of
shareholders`
net assets
Net value of 3 368 3 157
in-force
insurance
business
Value of in- 3 611 3 459
force
insurance
business
Opportunity
cost of
capital
adequacy
(243) (302)
requirements
Embedded 9 532 10 536
value
The embedded value of new business amounted to R206 million for the current
year, 28% less than the figure of R285 million for the prior year. As mentioned
at the interim stage, this reduction is directly attributable to the reduction
in single premium business without a commensurate reduction in new business
expenses. The embedded value of new business written during the year represents
a margin of 16% of the notional new business premiums (new recurring plus 10% of
single premiums), compared with 20% for the prior year.
The embedded value loss for the year ended 30 June 2002 amounted to R246
million, calculated as the decline in the embedded value, net of dividends paid
during the year of R758 million. This decline represents a negative return on
embedded value of 2,3%. The main reason for the negative growth in embedded
value was the decline in the share price of Discovery Holdings, which
constituted 29% of the actuarial value of shareholders` net assets at 30 June
2002.
The movement in the embedded value during the year can be analysed as follows:
Analysis of movement in Rm
embedded value
Embedded value at 30 June 10 536
2001
Embedded value loss (246)
Factors related to 885
operations:
Value of new business 206
Expected return on new 15
business
Expected return on 496
existing business
Experience assumption 39
changes
Operating experience 129
variations
Factors related to market (1 131)
conditions:
Investment return on (995)
shareholders` net assets
Change in economic (74)
assumptions
Investment variations (62)
Less: Dividends paid (758)
Embedded value at 30 June 9 532
2002
The following table provides an analysis of the main economic assumptions used
in calculating the embedded value at 30 June 2002:
Economic 2002 2001
assumptions
Risk discount rate 15,5% 14,5%
Investment returns 13,5% 12,5%
(before tax)
Expense inflation 9,5% 8,5%
rate
The adjustments to these assumptions from the prior year are a consequence of
the increase in long-term interest rates over the year. The net reduction in
embedded value of the changes in these assumptions is R74 million.
Group assets under management and administration
The Momentum Group managed or administered total assets of R190,6 billion at 30
June 2002 compared with R182,9 billion at 30 June 2001, an increase of 4,2%. As
mentioned elsewhere in this announcement, from 1 January 2002, the assets
managed by Futuregrowth are no longer included in `group assets under
management` as the group`s holding in Futuregrowth reduced to 40% at that date.
The comparative figures to 30 June 2001 include R9 billion in off-balance sheet
assets managed by Futuregrowth.
The following table provides a breakdown of the assets managed or administered
by group companies:
30 June 30 June
Assets under 2002 2001 %
management
and Rbn Rbn change
administration
On-balance 92,3 80,9 14,1
sheet assets
Assets managed
on behalf
of third 75,2 80,1 (6,1)
parties
Unit trust 16,9 16,7 1,2
funds managed
Assets under 184,4 177,7 3,8
management
Linked product
assets under
6,2 5,2 19,2
administration1
Total assets
under
management
and 190,6 182,9 4,2
administration
1 Excludes business written by the Momentum Group`s Linked Product Packager on
the life company`s balance sheet, as these assets are reflected under on-balance
sheet assets above. Total linked product assets under administration amounted to
R13,9 billion (2001: R11,7 billion).
Funds received from clients
Total new business inflows of R31,2 billion were received during the year, an
increase of 8,3% compared to the R28,8 billion for the prior year. New recurring
business in the individual life and employee benefits areas were boosted by
sales of Discovery Life products, whilst individual life single premiums, linked
products and unit trust investments all declined. The following table provides
an analysis of the new business inflows, which include 100% of the Discovery
figures:
2002 2001 %
New business Rm Rm change
Annualised 3 030 2 824 7,3
recurring
premiums
Individual 818 650 25,8
life1
Employee 137 91 50,5
benefits1
Health 2 075 2 083 (0,3)
insurance2
Lump sum 17 456 18 695 (6,6)
inflows
Individual 3 021 3 944 (23,4)
life premium
income
Corporate
policy
premium
income 1 240 1 006 23,3
Employee
benefits
premium
income 2 927 2 727 7,3
Linked 2 920 2 963 (1,5)
product
sales3
Unit trust 5 245 5 305 (1,1)
sales - local
Unit trust 2 103 2 750 (23,5)
sales -
offshore
Segregated 10 665 7 233 47,4
third party
inflows4
Total new 31 151 28 752 8,3
business
inflows
1 Includes the annualised premiums relating to sales of Discovery Life products
amounting to R236 million (2001: R85 million) under individual life business,
and R28 million (2001: R8 million) under employee benefits business.
2 Includes the new annualised premiums relating to the sales of Destiny Health
products of R206 million (2001: R12 million).
3 Includes sales of products on the life insurance balance sheet amounting to
R1,2 billion (2001: R1,6 billion) and linked product sales in the UK of R1,3
billion (2001: R607 million).
4 Includes the once-off inflow of assets from a single institutional mandate of
R5,1 billion.
All transfers between on and off-balance sheet funds have been excluded from the
above.
Taking into account the inflows from existing business as well as the new
business inflows detailed above, the total funds received from clients amounted
to R35,8 billion, an increase of 9,5% over the 2001 figure. The components of
this inflow are set out in the following table:
2002 2001 %
Funds Rm Rm change
received from
clients
Individual 7 474 7 978 (6,3)
life premium
income
Single 3 021 3 944 (23,4)
premiums1
Corporate 1 240 1 006 23,3
policy
premiums
Recurring 3 213 3 028 6,1
premiums
Employee
benefits
premium
income 4 309 3 991 8,0
Single 2 927 2 727 7,3
premiums
Recurring 1 382 1 264 9,3
premiums
Health
insurance net
premium
income 3 132 2 531 23,8
Gross
inflows under
7 545 5 455 38,3
management
Less:
Medical
scheme and
money (4 234) (2 676) (58,2)
market
contributions
Less: (179) (248) 27,8
Reinsurance
premiums
Linked 2 920 2 963 (1,5)
product sales
Unit trust 7 348 8 055 (8,8)
sales
Local 5 245 5 305 (1,1)
Offshore 2 103 2 750 (23,5)
Segregated 10 665 7 233 47,4
third party
inflows
Total funds
received
from 35 848 32 751 9,5
clients
1 Single premiums exclude funds retained through the extension of the original
policy term, amounting to R457 million (2001: R446 million).
All transfers between on and off-balance sheet funds have been excluded from the
above.
Payments to clients
Total payments to clients for the year of R32,1 billion represents an increase
of 14,5% compared to the prior year. The increased outflow in the segregated
third party funds was a result of large benefit withdrawals by retirement fund
clients.
The following table provides an analysis of these outflows:
2002 2001 %
Payments to Rm Rm change
clients
Individual 5 561 5 037 10,4
life
Corporate 669 273 >100,0
policies
Employee 4 287 4 708 (8,9)
benefits
Health 1 722 1 473 16,9
insurance
Linked 2 491 3 061 (18,6)
products1
Unit trusts - 5 085 4 593 10,7
local
Unit trusts - 1 716 2 452 (30,0)
offshore
Segregated 10 593 6 469 63,8
third party
funds
Total 32 124 28 066 14,5
payments to
clients
1 Includes outflows relating to products on the life insurance balance sheet
amounting to R1 billion (2001: R742 million).
All transfers between on and off-balance sheet funds have been excluded from the
above.
Net flow of funds
The net flow of funds from clients for the year totalled R3,7 billion (2001:
R4,7 billion). This decline was the result of lower single premium individual
life inflows, coupled with the increased local unit trust repurchases and the
increased segregated third party fund benefit withdrawals. The following table
sets out the net flow of funds per business category, which takes account of the
total inflows set out above, and the outflows to clients for the year:
2002 2001 %
Net flow of Rm Rm change
funds
Individual 673 1 935 (65,2)
life
Corporate 571 733 (22,1)
business
Employee 22 (717) >100,0
benefits
Health 1 410 1 058 33,3
insurance
Linked 429 (98) >100,0
products
Unit trusts - 160 712 (77,5)
local
Unit trusts - 387 298 29,9
offshore
Segregated 72 764 (90,6)
third party
funds
Total net 3 724 4 685 (20,5)
flow of funds
accounting policies
The accounting policies applied are consistent with those of the previous year,
except as set out below. Where necessary, comparative figures have been adjusted
to conform with changes in presentation in the current year.
In anticipation of the adoption of AC 133, unrealised gains in the shareholders`
assets, previously accounted for in the life fund, are now credited or debited
directly to an investment reserve, which is a non-distributable reserve.
Prospects
The limitations placed by the Reserve Bank on offshore investments will continue
to place pressure on new business growth in Momentum`s chosen target market. In
addition, the decline in South Africa`s savings rate as a percentage of GDP from
22% in the late-80`s to 15% in 2001, may negatively affect future growth
prospects. It is however encouraging to note that the last quarter of this past
financial year has seen an upturn in individual life and linked product new
business, with the first two months of the new financial year continuing this
trend.
Due to the fact that investment returns remain the main profit driver for the
group, earnings growth will be determined to a large degree by the performance
of local and international investment markets. The current uncertainty regarding
the direction of international markets makes it difficult to predict future
profit growth. Notwithstanding these factors we are cautiously optimistic that
the diversity of group earnings, coupled with the ongoing focus within the
various businesses, should result in us maintaining real profit growth going
forward.
12 September 2002
L L Dippenaar H P Meyer
Chairman Managing Director
Momentum Group Limited
Reg No 1904/002186/06
Postal address
PO Box 7400, Centurion, 0046. Telephone (012) 671 8911
Date: 16/09/2002 01:00:00 PM Produced by the JSE SENS Department
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