| Wed 15 Sep 2004, 9:32 | | FirstRand packs enough firepower' to fund coming e |
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FirstRand packs enough firepower` to fund coming empowerment deal
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Financial Services Editor
FIRSTRAND, SA`s second-largest banking group, says it is confident that it will tie up a black economic empowerment deal by the end of the year.
Announcing results for the year to June yesterday, the financial services group said it had already signed a memorandum of understanding with four broad-based partners and was currently negotiating funding for the deal, expected to be worth in the region of R5bn.
Although it was trying to raise third-party funding, CEO Laurie Dippenaar said the group would also consider financing part or all of it if it was unable to raise enough funds.
`We could go the Standard Bank route. It`s a fall-back position that we have,` Dippenaar said. `We have the firepower.`
Part of that firepower could come from a R2,5bn-preference share issue the group is planning for next month. It said this would reduce the group`s weighted average cost of capital.
The group is also waiting for final regulatory approval for the sale of its Ansbacher operations in the UK, which would give it excess capital that would be used to either reduce existing gearing, buy back shares, make acquisitions or fund empowerment .
In the 2004 financial year, Dippenaar said the group was `firing on all cylinders`, with most business units contributing to the 19% increase in headline earnings a share of 110,3c.
Banking was the biggest contributor, making up 78,1%, while life assurance subsidiary Momentum made up 17% and health insurance group Discovery made up 4,3%.
The group`s banking activities benefited from the benign environment other banks have also witnessed . Lower interest rates and inflation saw bad debts and nonperforming loans falling to their lowest levels ever.
While Dippenaar described the current low interest rates as a double-edged sword due to the negative effect they had on the group`s interest income, FirstRand compensated for the margin squeeze with strong growth in noninterest income and hedging activities.
`Earnings per share were slightly lower than expected, but I do not think that there is too much to be concerned about. Expenses were a little bit disappointing but overall I think the bank performed very well,` Jacques Badenhorst, banks analyst at JP Morgan, said yesterday.
`FirstRand Bank`s divisional performance, in my view, was good. Rand Merchant Bank delivered an exceptional performance in a tough environment while the retail bank continued to benefit from strong demand for household credit and a decline in credit risk.`
Badenhorst said while FirstRand`s overall costs were up 10%, this was partly driven by homeloan origination costs, which were included in the expense line. Excluding origination costs, expenses increased 9%.
`In a low-inflation environment, management should be able to bring the growth in total expenses down to around 7% or 8%,` Badenhorst said.
FirstRand increased its total dividend for the year 31%, by reducing its dividend cover from 2,85 to 2,5 times. It said this was sustainable due to its capacity to generate surplus capital.
`With a 24% return on equity in a low-inflation environment, you are going to generate surplus capital,` Badenhorst said.
The Bottom Line: Page 16
Sep 15 2004 07:25:11:000AM Stephen Gunnion Business Day 1st Edition
