| Tue 19 Sep 2006, 8:30 | | FirstRand - Audited results for the year ended 30 |
|
FSR
FSR
FirstRand - Audited results for the year ended 30 June 2006
Firstrand Limited
(Incorporated in the Republic of South Africa)
(Registration number: 1966/010753/06)
ISIN: ZAE000066304
Share Code (JSE): FSR
Share Code (NSX): FST
("FirstRand" or "the company" or "the Group")
AUDITED RESULTS FOR THE YEAR ENDED 30 JUNE 2006
HIGHLIGHTS
- Headline earnings +21%
- Diluted headline earnings per share +20%
- Normalised earnings (unaudited) +21%
- Diluted normalised earnings per share (unaudited) +19%
- Ordinary dividend per share +20%
- Total assets under management or administration +24%
INTEGRATED FINANCIAL SERVICES
INTRODUCTION
This report covers the financial results of FirstRand Limited (`FirstRand" or
`the Group"), its wholly-owned subsidiaries FirstRand Bank Holdings Limited
(`the Banking Group"), Momentum Group Limited (`Momentum Group") and its 57.1%
(2005: 62.3%) subsidiary Discovery Holdings Limited (`Discovery"). The Group is
segmented into the Banking Group, Momentum Group and Discovery Group.
Comprehensive reports relating to the wholly-owned segments are included in this
report and should be read in conjunction with this report. Given the accounting
anomalies that impact headline earnings, this report discloses normalised
earnings, which the Group believes reflect operational performance.
BASIS OF PRESENTATION
The information presented has been prepared in accordance with International
Financial Reporting Standards (`IFRS") applicable at 30 June 2006. A full
transitional report on the adoption of IFRS was prepared and has been circulated
to shareholders in a separate booklet as part of the interim financial results
at 31 December 2005.
FINANCIAL PERFORMANCE
FirstRand produced excellent results, growing normalised earnings by 21%.
Headline earnings grew 21% and were impacted by the exclusion of the profit on
disposal of equity accounted private equity associates, the agreement by
Momentum with the National Treasury, the Discovery BEE transaction and
consolidation of treasury shares. FirstRand believes that normalised earnings
reflect the operational performance of the Group. The table below shows the
reconciliation between normalised earnings and headline earnings.
Year ended
30 June
R million 2006 2005 % change
Headline earnings (audited) 8 115 6 723 21
Adjustments 703 553
Private equity realisations 219 406
Agreement with National Treasury 30 -
Discovery BEE transaction 102 -
Treasury shares 352 147
Normalised earnings (unaudited) 8 818 7 276 21
These results were achieved in a positive economic environment which provided
strong organic growth opportunities for the Group"s banking and insurance
businesses. The Banking Group, which produced normalised earnings growth of 20%
to R7 268 million, benefited from an outstanding performance from Rand Merchant
Bank (`RMB") and strong performances from First National Bank (`FNB") and
WesBank. Sustained low interest rates continued to result in strong advances
growth for FNB and WesBank although margin pressure increased. The strong equity
markets and a healthy pipeline of BEE transactions underpinned the excellent
performance of a number of RMB"s businesses.
Momentum Group delivered strong results in what remained a challenging operating
environment, growing normalised earnings 23% to R1 564 million. The combination
of buoyant equity markets and the continued success of Momentum"s distribution
model resulted in a significant increase in lump sum investment inflows. Sales
of recurring premium risk policies also continued to show strong growth,
although sales of recurring premium investment products were negatively impacted
by a reduction in retirement annuity sales.
Discovery delivered an excellent performance growing normalised earnings by 34%
to R424 million. This performance reflects Discovery"s successful organic growth
strategy.
Group earnings, headline earnings and normalised earnings per share
Year ended
30 June
cents 2006 2005 % change
Earnings per share (audited)
- Basic 171.6 137.3 25
- Diluted 166.0 134.5 23
Headline earnings per share
(audited)
- Basic 157.8 129.3 22
- Diluted 152.6 126.7 20
Normalised earnings per share
(unaudited)
- Basic 156.9 132.4 19
- Diluted 156.7 131.4 19
The relative contributions to normalised earnings by the various operating
businesses were:
Year ended 30 June
% 2006 2005
Banking Group 78 79
Momentum Group 17 17
Discovery 5 4
100 100
ECONOMIC OVERVIEW
Economic conditions remained very positive during the year with stable inflation
and interest rates resulting in continued strong growth in consumer expenditure,
income and output. Corporate profitability and private sector fixed investment
also showed strong growth, which supported job creation.
Consumer confidence remained high and this, combined with low interest rates,
resulted in substantial increases in consumer borrowings. Demand for asset-
backed credit was particularly strong. Further income tax relief and the
increase in government grants boosted the income of many of the lower income
groups and this also positively impacted on consumer spending.
Business confidence remained at record high levels and although corporate
balance sheets continue to be strong, corporate credit demand increased as
companies took advantage of favourable financing conditions to fund capital
expenditure projects.
Short-term interest rates remained stable during the year under review. This
resulted in further asset price growth and very buoyant equity markets, with the
FTSE-JSE Top 40 Index increasing by 52% during the financial year, although
property prices lost some of the momentum of previous years.
The Life Offices" Association (`LOA") statistics on new business growth in the
life insurance industry indicate that new recurring premium and single premium
business increased by 10% and 13% respectively in the year to December 2005.
Sales of new recurring retirement annuity (`RA") products declined 15% over the
same period.
Discretionary retail investment product providers, comprising mainly Collective
Investment Schemes (`CIS"s") and Linked Investment Service Providers (`LISP"s"),
continue to benefit from increased lump sum inflows. The Association of
Collective Investments (`ACI") reported that total unit trust net inflows of R50
billion were recorded for the year 30 June 2006.
STRATEGIC ISSUES
Agreement with National Treasury
The total impact on Momentum and Sage of the agreement with National Treasury
regarding minimum standards on early termination values, that was reached on 12
December 2005, amounts to R196 million after tax. The impact on Momentum is R108
million, with the balance representing Sage. The balance of R88 million is a
charge against pre-acquisition earnings of Sage.
As a provision of R78 million after tax already existed at 30 June 2005, the
full balance of the Momentum charge of R30 million after tax has been taken
against current year earnings.
Momentum is well advanced in adapting its systems ahead of the 1 October 2006
implementation date of the agreement.
National Credit Act
The National Credit Act (`NCA") was enacted during May 2006 with the provisions
relating to fees and pricing effective 1 June 2007. The impact to revenue has
not been fully determined, given that the regulations governing the detail of
the Act are yet to be finalised. The Group estimates that the total
implementation costs of the NCA will range between R140 million and R270
million.
FNB believes that the NCA will provide significant opportunities for the
established players to enter new markets.
Competition Commission enquiry
One of the key challenges facing the industry is the Competition Commission
enquiry. On 4 August 2006, the Competition Commission announced an enquiry which
will focus on the following:
- the level and structure of charges made by banks, as well as other
providers of payment services;
- the feasibility of improving access by non-banks and would-be banks to the
national payment system infrastructure so that they can compete more
effectively; and
- any other aspects relating to the payment system which could be seen as
anti-competitive.
Capital management
The Group"s capital management strategy aims to enhance shareholder value. This
is achieved through the proactive management of the level, investment and
allocation of capital. During the year, the following actions were taken:
In November 2005, the Group raised R1.5 billion through the issue of non-
cumulative non-redeemable preference shares to further enhance the level and
structure of its capital base. R500 million was deployed to Momentum for its
acquisition strategy and R1 billion was utilised to refinance the vendor
component of the BEE transaction, which was previously funded by the Banking
Group. This eliminated the capital impairment in the Banking Group.
During the year, Momentum issued a further R1 billion subordinated debt to
further improve efficiency of its capital structure.
In October 2005, the Banking Group issued R1 billion subordinated bonds. In June
2006, there was a further issue of R3 billion. The Group considered the market
conditions to be favourable and therefore took maximum opportunity to raise debt
capital and this resulted in an excess of debt capital of R1.5 billion. The
strategy is to utilise this excess for future funding and capital requirements.
Momentum has an excess of 0.9 times over its target range of between 1.8 and 2.2
times Capital Adequacy Requirement (`CAR") cover. As a result, a special
dividend of R500 million was declared to FirstRand on 30 June 2006 which the
Group utilised to reduce debt at the centre. The Group"s strategy is to utilise
Momentum"s remaining excess capital for further organic growth requirements.
FirstRand Bank securitised R2 billion of vehicle finance loans originated by
WesBank during the year. The Group has obtained approval from the SARB to
securitise up to R15 billion of asset-backed securities, primarily home loans
and vehicle finance loans originated by FNB HomeLoans and WesBank respectively.
Securitisation enhances a bank"s liquidity position, diversifies its sources of
funding across the maturity spectrum and optimises the composition of its
balance sheet. It improves the liquidity risk position of the bank through
matched funding as the cash flow profile of the securitisation bonds generally
match the cash flow profile of the assets securitised.
OVERVIEW OF RESULTS
Banking Group
The Banking Group produced excellent results for the year, benefiting from
strong performances from RMB, FNB and WesBank. RMB had a particularly
outstanding year, growing profit before tax by 38%, with much of the growth
driven by the excellent performance of its equity related businesses.
The strong performances by FNB and WesBank were driven in part by good economic
conditions which provided significant consumer credit demand, particularly for
asset-backed finance, together with increased customer numbers and transaction
volumes. In addition, the implementation of a number of innovative growth
strategies across all the businesses created additional organic growth.
The combined impact of increased volumes and the bank"s hedging strategies,
compensated for pressure on margins experienced by FNB and WesBank. Margin
pressure on certain assets, particularly home loans and vehicle finance,
intensified during the financial year, primarily due to competitive pricing
pressure. The increased use of wholesale funding sources, as a result of low
retail savings in South Africa, further exacerbated the margin squeeze on
liabilities.
Net interest income and interest margins benefited from the improved mix in the
lending book as a result of an increase in retail lending and a decrease in
large corporate advances. Non-interest income continued to grow very strongly,
increasing 33%, reflecting significant increases in customer numbers and
transaction volumes at FNB and high growth in new business and cross-selling of
insurance products at WesBank.
The significant growth in investment income (>100%) and income from associates
and joint ventures (up 28%) again reflects the outstanding performance from
RMB"s private equity business.
Operating expenses increased 15%, reflecting high new business acquisition costs
and infrastructure investment. Despite these investments, based on normalised
earnings, the cost to income ratio reduced from 56% in 2005 to 53% in 2006.
First National Bank
FNB produced excellent results for the year, with profit before tax increasing
22% to R5.06 billion. Its segment strategy continues to be successful as it
facilitates product innovation and differentiation.
Interest income grew 19%, attributable to the strong balance sheet growth during
the last quarter of the 2005 financial year and the whole of the period under
review. Non-interest income grew 21%, as a result of increased customer numbers
and transaction volumes, particularly in the Mass, Card, Consumer and Commercial
segments.
Bad debts increased to 0.5% of advances (up from 0.3% in the previous year),
however this normalisation of bad debts was anticipated given the abnormally low
levels of arrears in the past few years. Pricing strategies have taken these new
levels into account.
Operating expenses increased 16%, although much of this growth reflected
variable costs such as new business expenses and investments in the network and
processes. Base costs only increased 9%.
Advances grew 31% with HomeLoans and Card Issuing being the major contributors.
Although FNB grew advances to the medium corporates, large corporate lending
continued to decline, reflecting the bank"s stated strategy to focus on
transactional banking in this segment.
Deposits grew 20% with particularly good growth from corporates. FNB continued
with its strategy to attract retail deposits and the Million a Month account
increased its customer base to 400 000 accounts, contributing positively to the
overall retail deposit growth.
In the Consumer segment, HomeLoans and Card Issuing contributed significantly to
advances growth, which was up 39% to R93 billion. HomeLoans maintained its
strong growth trend, growing advances 40% to R81 billion as a result of a 58%
increase in new business written, and maintaining its new business market share
at just over 20%. The One Account also grew strongly and increased its loan book
to R4.9 billion from R1.3 billion in the previous year.
Card Issuing increased profit before tax 42% and grew advances 36% to R9
billion. This excellent performance resulted from both increased customer
numbers and customer spending, with card turnover up 33%.
In the Wealth segment, RMB Private Bank performed particularly well, increasing
pre tax profit 76%. Assets under management continued to grow, increasing 57% to
R18 billion, mainly due to growth in the equity market, investment selection and
net new business inflows. Advances grew 29% to R16 billion and deposits showed
very strong growth of 32%.
The Commercial segment, which services the medium corporates, had an excellent
year, growing pre tax profit 23%. Good deposit growth reflected strong consumer
demand and retail sales and the advances growth of 25% was driven mainly by FNB
Leveraged Finance and Commercial Property Finance, both of which are growing
rapidly off a relatively low base. Strong transactional volumes resulted in non-
interest income growing 19%.
The Mass segment performed particularly well in the current year. Non-interest
income grew 26% driven by 18% growth in transacting accounts and 19% growth in
ATM transactions. FNB has been pursuing a lending strategy in this segment and
achieved 82% growth in advances mainly driven by the Smart Spend, Smart
HousingPlan and Smart Bond products. Cell phone banking continued to be very
successful, with a total of 215 000 customers, and generating profits on a
monthly basis.
Rand Merchant Bank
RMB delivered an exceptional performance in 2006 producing year-on-year pre tax
profit growth of 38%. This performance was mainly due to the equity businesses,
which benefited from the buoyant equity markets and low interest rate
environment. The healthy economic environment and continued BEE activity were
also positive for originated debt and advisory mandates. The proprietary trading
and arbitrage businesses experienced mixed success in challenging market
conditions, although increased volatility towards the end of the year benefited
the forex and debt trading books. RMB"s strategy to focus on managing client
relationships has been extremely successful and provided good growth
opportunities during the year.
The Private Equity business delivered an outstanding performance. The strong
equity market provided good opportunities for the realisation of a number of
investments and significant growth in equity accounted earnings. The unrealised
profit in the remainder of the portfolio also increased and BEE continued to
provide good opportunities to invest in new assets at reasonable prices.
Equity Trading recorded another strong performance in 2006, posting year on year
growth of 68%.
Corporate Finance delivered exceptional results for 2006 with a number of
significant M&A deals, including the Venfin and Kumba transactions. For the
second year running RMB was the top corporate finance house according to both
the Dealmakers and PricewaterhouseCoopers (`PwC") league tables.
Structured Finance delivered exceptional growth on the prior year"s performance,
taking advantage of opportunities in the property, acquisition and leverage
finance markets. Despite tightening credit spreads, strong deal flow and
innovative structuring solutions delivered particularly strong fee income
performance. Collaboration with Corporate Finance in the preference share market
also produced excellent results.
The Project, Trade and Commodity Finance business benefited from the strong
pipeline of project finance opportunities locally and in Africa, despite the
slower than expected roll out of Private Public Partnership (`PPP") deals in
2006. Project Finance is well positioned to take advantage of the considerable
opportunities that PPPs present.
SPJ International delivered a good performance. It exited from the US high yield
market and reduced its exposure to emerging markets as credit spreads tightened.
This limited the financial effect of the correction in the emerging market
spreads in the last quarter.
The Offshore Resources division comprises the energy trading business of Nufcor
and the private equity business of RMB Resources. Both divisions delivered
exceptional performances, doubling contributions compared to the prior year.
Nufcor took advantage of the significant increase in the price of uranium to
generate very strong trading profits. RMB Resources benefited from a number of
realisations and a strong increase in equity accounted earnings from primarily
resource based associate investments.
WesBank
WesBank had a very good year with pre tax profits increasing by 25%, extending a
period of strong profitability, with annual compound growth over the last three
years of 36.5%. Advances increased R15.1 billion (23.9%), excluding the impact
of securitisations, driven by increased market share and high new business
volumes. Total new business written was R50.8 billion, an increase of 28.4%, and
included R700 million written in the Motor One Finance business in Australia.
The Motor, Corporate, Fleet and Personal Loans divisions increased new business
22.2%, 46.8%, 19.7% and 48.5% respectively. The Motor Division comprises 70% of
total new business and its growth reflects the continued buoyancy in the motor
industry. Increasing capital investment demands combined with increasing
collaboration with FNB, resulted in high growth in the Corporate Division.
Personal Loan growth reflected the higher debt appetite in the middle-income
market.
Bad debts were 0.8% of gross advances and non-performing loans 1.2% of gross
advances. These figures are up from 0.5% and 0.9% respectively in the prior year
and reflect a combination of increased consumer indebtedness, as well as the
reduction in realisation values on vehicles as security. They remain, however,
within WesBank"s long-term target range.
Interest margins declined from 3.61% to 3.46% due to further compression of
short-term funding rates, as well as competitive pressures on customer rates.
Non-interest revenue increased 26.2% and was largely driven by high new business
volumes and the increased penetration of insurance products. WesBank Auto, the
fleet card offering, showed further growth in customers and corresponding
revenue streams.
Costs increased 18.4%, against new business growth of 28.4%, with both the cost
to income and cost to asset ratios improving, from 46.8% to 43.0% and from 2.39%
to 2.28% respectively. The cost increases resulted from investment in capacity
to deal with the high volumes currently experienced and expected into the
future. The platform has now been built and this level of annual cost increases
is not forecast to continue into the new financial year.
FNB Africa subsidiaries
Despite operating in challenging economies, particularly in Namibia and
Swaziland, the income after tax of FNB"s African subsidiaries grew 18.3% for the
financial year.
FNB Botswana
FNB Botswana continued to perform well with income after tax increasing 22.7% to
P238.4 million (8.2% in Rand terms due to the Pula depreciation). Non-interest
income grew 22.4% mainly due to increased product offerings and transactional
volumes, as well as growth in forex income. Although advances grew only 9.7%,
the property portfolio performed exceptionally well growing by 42%.
Despite inflation running at 12%, operating expenses were well contained to a
10% increase and this, together with the solid non-interest revenue increase,
resulted in the cost to income ratio reducing further from 38% to an excellent
35%.
FNB Namibia
FNB Namibia offers a wide range of banking services and insurance products and
services from FNB, WesBank and RMB Asset Management and despite the moderate
growth in the economy, grew income after tax 21.3% to N$262 million. Non-
interest income increased 19.2% due to the focus on sales and effective cross-
selling across all businesses, substantially increasing the number of accounts
and transactional volumes. Operating expenses were well controlled, increasing
by 10.4%, and the cost to income ratio reduced to 47%.
Total assets grew 15.8% to N$9.5 billion and advances grew 17.3% to N$8 billion,
predominantly driven by HomeLoans and WesBank.
FNB Swaziland
There has been a significant turnaround in the Swaziland business compared to
2005 despite a stagnant economic environment. Income after tax grew 106.6% to
E31 million with non-interest income increasing 33% and operating expenses
increasing by only 7.1%. The cost to income ratio reduced to 59% after exceeding
80% in the previous year. Total assets grew 20% to over E1 billion, advances
grew 11% and deposits 22.9%.
FNB Lesotho
Despite the difficult operating environment, FNB Lesotho performed well above
expectations and achieved a maiden monthly profit in December 2005, thirteen
months after start-up. The main drivers of this performance were the growth in
the liability base as well as transactional revenues allied to the growing
account base. Credit growth was in line with expectations, although off a low
base. This growth is attributed primarily to the WesBank operation.
OUTsurance
OUTsurance continued to grow strongly increasing operating profit 21%. This was
largely driven by growth in premium income which resulted principally from
growth in client numbers, as premium adjustments were contained in line with
inflation.
Management and marketing expenses, as a percentage of net premium revenue,
increased slightly from 16.2% to 16.4%. The main reasons for the higher costs
include an increase in the development of sales channels for Business
OUTsurance, as well as increased compliance costs.
The claims ratio of 58.3% (including OUTbonus costs) was 0.7 percentage points
higher than the previous year. The slight increase was mainly due to weather-
related claims. The short-term insurance industry as a whole registered
significantly higher claims ratios and the underwriting cycle turned downwards.
Against this background, OUTsurance maintained its profit margin, reflecting the
competitiveness of its low-cost direct business model and scientific rating
approach.
Momentum Group
The Momentum Group delivered strong results in what remained a challenging
environment. Good organic growth was achieved in individual recurring risk and
lump sum retail investment flows, however sales of recurring premium investment
products were negatively impacted by a reduction in retirement annuity sales.
Collaboration with the wider FirstRand Group progressed well. Sales from the two
joint ventures with FNB, namely FNB Life in the mass market and Aspire in the
middle market, increased significantly, mainly as a result of credit life
policies embedded in the bank"s products.
Sales of Momentum products through the FNB Financial Consultants distribution
channel increased significantly and Momentum"s short-term insurance initiative
is generating new business volumes ahead of the business plan.
The integration of Sage Group Limited (`Sage") progressed well, with the
conversion of 260 000 Sage Life policies to the Momentum IT platform completed
within a 100-day timeframe.
Normalised group earnings before the once-off impact of the agreement with
National Treasury, increased 23% to R1 564 million for the year ended 30 June
2006. Group headline earnings, after the impact of the agreement with National
Treasury, increased 21% to R1 534 million. Earnings attributable to ordinary
shareholders increased 42% to R1 909 million.
Total assets under management or administration increased 31% to R353.7 billion,
mainly due to the growth in equity markets and the acquisition of Sage.
The headline return on equity (`ROE") amounted to 24.1% before the impact of the
agreement with National Treasury, compared with 24.5% in the prior year. This
ROE is in excess of Momentum"s internal target of 20.8%, representing the
weighted average cost of capital plus 10%. The return on embedded value for the
year was 31%.
Insurance operations
The local insurance operations increased operating profit 22% to R883 million.
The strong growth in investment markets impacted positively on the results,
although the increased new business levels and the investment in the agency
force resulted in new business strain, which dampened new business profit
growth.
The value of new business, which represents the present value of profits from
new business, increased 18% to R434 million, driven mainly by the increased new
business volumes. However, the margin on new business declined from 2.6% to 2.2%
because of reduced fee charges and a change in the new business mix.
The integration of the Sage agency force into the Momentum distribution
environment was completed, with the combined agency operation increasing its
contribution to new recurring premium product sales during the year. Although
the new tied agency force is not yet operating at optimum capacity, it provides
a solid platform for future new business growth in an area of the market where
Momentum has not traditionally been well represented.
Asset management operations
The asset management operations increased earnings by 40% to R347 million, with
the local asset management operations, represented mainly by RMB Asset
Management (`RMBAM"), generating an excellent 37% increase in headline earnings.
Strong market growth in the institutional business, offset marginally by a net
outflow of funds, resulted in increased asset values and consequently higher
fees. Positive retail unit trust net inflows also benefited income levels.
The withdrawal of the Aflife assets following Momentum"s disposal of its stake
in Aflife to Sanlam, has impacted negatively on off-balance sheet funds under
management, whilst Momentum"s acquisition of Sage has benefited Group assets
managed on-balance sheet.
Discovery Group
The year under review has been a particularly successful one for Discovery, with
important developments in each of its businesses, strong earnings growth and the
declaration of a maiden dividend.
Discovery has consistently followed a philosophy of pursuing organic growth,
funded from internal resources without recourse to debt. Discovery is now in a
position of having built both scale and platforms for future growth and is now
strongly cash-generative. The level of the maiden dividend has been set taking
into account Discovery"s future capital and growth needs.
Discovery Life
Discovery Life"s performance exceeded expectations. The core driver of Discovery
Life"s performance is the leadership position that it has achieved in the
protection market.
During the year, Discovery Life entered the retirement funding market with the
launch of the Discovery Retirement Optimiser. The company estimates that its
market share of new business amounted to approximately 17% of the independent
broker recurring premium Retirement Annuity market, in just its first year of
entry.
Discovery Health
Discovery Health"s performance was pleasing. The number of lives covered on the
Discovery Health Medical Scheme (`DHMS") and other medical schemes under
management increased 9% to 1.94 million from 1.78 million. The size of the DHMS
is now 3.8 times greater than that of its nearest competitor.
The company continued its growth in the lower income market through its KeyCare
product range and formed a proprietary network of 2 055 doctors and 64 hospitals
specifically to care for KeyCare members.
Service levels reached their highest levels yet, and substantial efficiencies
emerged, with staff headcount per thousand lives covered reducing by 13.2% over
the year. The combination of organic growth and expense efficiencies drove the
increase in operating profit.
Destiny Health
Destiny Health"s performance was disappointing for the financial year, although
its performance for the last six months was in line with expectations set at the
interim results stage.
Discovery has made the decision that the business model and strategy is not
sustainable and must change. Discovery, Destiny Health and the Guardian Life
Assurance Company of New York (Destiny Health"s exclusive distribution partner
in the US) are in the process of revisiting their partnership arrangement.
Vitality and DiscoveryCard
Vitality membership increased 7% to 522 516 members (2005: 486 416 members), and
the number of primary Discovery Card-holders increased 120% to 307 688 (2005:
139 563).
PruHealth
The performance of PruHealth, Discovery"s 50% joint venture with the Prudential
plc, was particularly pleasing. Members covered increased 696% to 58 912 (2005:
7 400), while new business increased 706% to R282 million (2005: R35 million).
Going forward, PruHealth is well positioned for continued growth. It is pursuing
a number of key strategies, including the broadening of its distribution
channels to the generalist Independent Financial Advisor (`IFAs") and an
acceleration of its direct-to-customer (`D2C") execution.
FirstRand Limited - central cost
Losses after tax in FirstRand Limited company decreased to R127 million as
reflected below:
Year ended 30 June
R million 2006 2005
Dividend income 204 -
Operating expenses (49) (31)
Taxation (185) (184)
Cumulative redeemable preference shares (97) (89)
Total (127) (304)
The dividend income from the BEE staff share trust relates to the FirstRand BEE
transaction whereby the Group made capital contributions to the various BEE
trusts to yield an effective return. The dividend income is more than offset by
the cost of funding. The yield for the comparative period was included in the
Banking Group results. The increase in operating expenses relates to the
professional fees paid for the restructuring of the staff component of the BEE
transaction. Taxation expenses increased due to higher Secondary Tax on
Companies (`STC") paid during the year following the reduction in the dividend
cover. The increase in the cumulative redeemable preference shares compared to
the prior year is as a result of the funding required for the BEE staff share
component.
CAPITAL MANAGEMENT
The Group actively manages its capital base with the objective of enhancing
shareholder value through its capital management framework. Capital is allocated
to FirstRand Group business units on an economic risk assumed basis, founded on
Basel principles.
The Banking Group invests its capital in interest bearing instruments to achieve
a desired interest return and risk profile. The lower interest rate environment
resulted in reduced returns, however this was partially offset by higher capital
levels and benefits derived from hedging strategies. The capital adequacy ratio
is at 12.8% (2005:12.5%) which is above the target range of 11.5% to 12.5%. The
Banking Group is well positioned to meet the requirements of Basel II, given the
proposed implementation date of 1 January 2008.
The Capital Adequacy Requirement for Momentum of R1 978 million was covered 3.1
times (2005: 2.2 times), which is an excess of 0.9 times over the targeted range
of between 1.8 and 2.2 times.
DIVIDEND POLICY
Ordinary shareholder dividend
The Group aligns its dividend policy with sustainable earnings growth therefore
dividend cover is based on normalised earnings. The Group has experienced strong
advances growth which is expected to slow marginally and this next cycle of
growth may result in a lower demand for capital from business units.
The Group will retain its dividend cover of 2,5 times normalised earnings for
dividend purposes. The Group believes it is a sustainable dividend cover given
the internal earnings generating capacity and the organic growth potential of
the businesses.
The proposed final dividend amounts to 34.0 cents, which together with the
interim dividend of 32.0 cents per share reflects an increase of 20% over total
dividend per share for 2005.
BASIS OF PRESENTATION AND ACCOUNTING POLICIES
FirstRand prepares its audited consolidated financial statements in accordance
with IFRS, on a going concern basis using the historical cost basis, except for
certain financial assets and liabilities where it adopts the fair value basis of
accounting.
These financial assets and liabilities include:
- financial assets held for trading;
- financial assets classified as available-for-sale;
- derivative assets and liabilities;
- financial assets and liabilities at elected fair value; and
- short trading positions.
The preparation of audited consolidated financial statements in conformity with
IFRS requires the use of certain critical accounting estimates. It also requires
management to exercise its judgement in the process of applying FirstRand"s
accounting policies.
In accordance with the transitional provisions set out in IFRS 1, `First-time
Adoption of International Financial Reporting Standards" and other relevant
standards, FirstRand has applied IFRS as at 30 June 2006 in its financial
reporting with effect from FirstRand"s transition date of 1 July 2004, with the
exception of the standards relating to financial instruments and insurance
contracts which were applied from 1 July 2005. Therefore the impact of adopting
IAS 32, IAS 39 and IFRS 4 are not included in the 2005 comparatives in
accordance with IFRS 1. FirstRand previously reported under South African
Generally Accepted Accounting Practice.
As part of the adoption of IFRS, FirstRand has changed its accounting policy in
respect of accounting for Joint Ventures from proportionate consolidation to
equity accounting, with effect from 1 July 2004.
Details relating to the changes resulting from the adoption of IFRS are set out
on FirstRand"s website at www.firstrand.co.za.
FINANCIAL IMPACT OF THE BLACK ECONOMIC EMPOWERMENT ("BEE") TRANSACTION
Background
IFRS 2 - Share-based Payments requires that all share-based payment transactions
for goods or services received must be expensed with effect from financial
periods commencing on or after 1 January 2005. During the past 18 months there
has been ongoing debate on whether BEE equity-linked transactions result in the
receipt of "goods" or "services", and therefore should be expensed in terms of
IFRS 2.
The International Financial Reporting Interpretations Committee issued an
interpretation IFRIC 8 - the Scope of IFRS 2 (`IFRIC 8") during January 2006.
IFRIC 8 clarifies that IFRS 2 applies to all share-based payment transactions
where the consideration received or to be received, either through identifiable
or unidentifiable goods or services, is less than the fair value of the equity
instruments issued or granted. IFRIC 8 is applicable for financial periods
commencing on or after 1 May 2006, on a fully retrospective basis, using the
transitional provisions of IFRS 2 read with IFRS 1.
Financial impact on the FirstRand Group
SAICA is in the process of finalising South African interpretation dealing for
accounting for BEE transactions in terms of IFRS 2. Consequently, FirstRand will
account for the non-staff component of the Group"s BEE transaction with effect
from the financial year commencing 1 July 2006, in accordance with the
requirements of IFRIC 8.
As a result, the full financial impact in terms of IFRS 2 of the non-staff
component of the BEE transaction, amounting to R1.655 billion, will be accounted
for as an opening reserve transfer on 1 July 2005, and will have no further
income statement effect.
CORPORATE GOVERNANCE
FirstRand has embraced the recommendations of King II on Corporate Governance
and strives to provide reports to shareholders that are timely, accurate,
consistent and informative.
PROSPECTS
The Group believes that South Africa remains in a structurally low interest rate
and inflation environment and economic prospects remain positive.
The cycle of interest rate increases in June 2006 and again in August 2006, is
expected to result in the low levels of bad debts experienced over the last few
years, of between 30 and 50 basis points (`bps") of advances trending back to
the long-term average of 70 bps of advances.
The higher levels of interest rates will also have a slight dampening effect on
consumer credit demand and spending. However the anticipated public and private
sector fixed investment leading up to 2010, together with increased BEE activity
and continued consumer demand, abeit at lower levels, should underpin future
growth.
The challenge going into the 2007 financial year will be to maintain robust top
line growth while managing expected increases in bad debt levels, which will
require an increased focus on efficiencies.
The increased volatility of investment markets makes any projections regarding
Momentum"s overall future performance extremely difficult. Increased consumerism
will continue to place pressure on the financial services industry, however the
Group is confident of the steps it has taken to address the value for money
issue through, among other strategies, revised fee structures.
Momentum"s focus is now on extracting efficiencies from existing operations,
improved service levels, continued product innovation and expansion into new
markets, such as the collaboration with FNB which now includes leveraging off
the FNB infrastructure into Africa. The success of the newly established tied
agency force will also be critical to future new business growth.
Overall FirstRand is confident, barring any unforseen circumstances, that the
growth strategies in place within its operating businesses will enable it to
achieve the targeted long-term growth in earnings of CPIX plus 10%.
GT Ferreira PK Harris
Chairman Chief Executive
Annual report
Comprehensive financial information relating to all Group entities will be
distributed to shareholders in due course. The financial information denoted as
"audited" in this document has been extracted in a summarised format from the
annual financial statements for the year ended 30 June 2006.
These results have been audited by PricewaterhouseCoopers Incorporated. Their
unqualified audit opinion is available for inspection at the company"s
registered office.
DIVIDEND DECLARATIONS
Ordinary shares
The following ordinary cash dividends were declared in respect of the 2006 and
2005 financial year.
Cents per share 2006 2005
Interim (declared 1 March 2005) 32.00 26.60
Final (declared 19 September 2006)* 34.00 28.50
66.00 55.10
* The last day to trade in FirstRand Shares on a cum-dividend basis in respect
of the final dividend will be Friday 13 October 2006 and the first day to trade
ex-dividend will be Monday 16 October 2006. The record date will be Friday 20
October 2006 and the payment date Monday 23 October 2006. No dematerialisation
or rematerialisation of shares may be done during the period Monday 16 October
2006 and Friday 20 October 2006, both days inclusive.
Preference shares
Dividends on the "A" preference shares are calculated at a rate of 65% of the
prime lending rate of banks and the following dividends have previously been
declared for payment:
"A" preference share
Rmillion
Period 1 July 2005 - 31 December 2005 23
Period 1 January 2006 - 30 June 2006 13
Dividends on the "B" and "B1" preference shares are calculated at a rate of 68%
of the prime lending rate of banks and the following dividends have previously
been declared for payment:
"B" "B1"
Preference Preference
cents per cents
share per share
2006 2006
Period 30 August 2005 - 27 February 2006 356 356
Period 28 February 2006 - 28 August 2006 363 363
AH Arnott
Company Secretary
19 September 2006
Description of normalised earnings
The Group believes normalised earnings accurately reflect operational
performance. Headline earnings are adjusted to take into account non-operational
and accounting anomalies.
Year ended 30 June
R million 2006 2005 % change
Headline earnings (audited) 8 115 6 723 21
Adjustments (unaudited) 703 553
Private equity realisations 219 406
Agreement with National Treasury 30 -
Discovery BEE transaction: 102 -
Treasury shares 352 147
-Adjust for effective shareholding in (28) (8)
Discovery
-Consolidation of staff share schemes 383 155
-FirstRand shares held by policyholders (3) -
Normalised earnings (unaudited) 8 818 7 276 21
Private equity realisations
In terms of IFRS, and specifically IAS 28 - "Investment in Associates",
investors in private equity or venture capital associate companies may elect to
either equity account or fair value associate investments. As part of its
conversion to IFRS, FirstRand elected to continue to equity account for its
private equity associate investments.
On 4 May 2006, the Accounting Practices Committee, (`APC") of the South African
Institute of Chartered Accountants (`SAICA") published Issue 8 of Circular
7/2002 - "Headline Earnings". In terms of the Circular, profits or losses on the
realisation of all equity accounted private equity or venture capital
investments are to be excluded from the calculation of headline earnings.
FirstRand will continue to disclose normalised headline earnings and normalised
headline earnings per share information, which includes the profits or losses on
disposal of private equity investments. FirstRand will continue with its policy
of using normalised headline earnings as the basis for determination of dividend
payments.
FirstRand regards private equity to be a core component of its investment
banking business. Accordingly, FirstRand does not agree with the circular and it
further believes that the document contradicts the intention of calculating
headline earnings, which is to exclude profits and losses on disposal of
businesses.
Agreement with National Treasury
The total impact on Momentum and Sage of the agreement with National Treasury
that was reached on 12 December 2005, amounts to R196 million after tax. The
impact on Momentum is R108 million. The balance of R88 million is a charge
against pre-acquisition earnings of Sage.
As a provision of R78 million after tax already existed at 30 June 2005, the
full balance of the Momentum charge of R30 million after tax has been taken
against current year earnings.
Momentum is well advanced in adapting its systems ahead of the 1 October 2006
implementation date of the agreement reached with National Treasury regarding
minimum standards on early termination values.
Discovery BEE transaction
In December 2005, Discovery issued 38.7 million shares in terms of its BEE
transaction. The special purpose vehicles and trusts to which these shares have
been issued, have been consolidated into the accounts of Discovery, eliminating
the share issue.
The normalised adjustment:
- adds back the IFRS 2 charge
- adds back the treasury shares to equity.
Treasury shares: Effective shareholding in Discovery Holdings Limited
Discovery consolidates in its results treasury shares relating to their BEE
transaction, which effectively increases FirstRand"s share in Discovery from
57.1% to 62.3%. This adjustment relates to reflect the actual shareholding in
Discovery of 57.1%
Treasury shares: Consolidation of staff share schemes
FirstRand hedges itself against the price risk of the FirstRand share price in
the various staff share schemes. The staff schemes purchase FirstRand shares in
the open market to ensure the company is not exposed to the increase in the
FirstRand share price. Consequently, the cost to FirstRand is the funding costs
of the purchases of FirstRand"s shares by the staff share trust. These trusts
are consolidated and FirstRand shares held by the staff share scheme are treated
as treasury shares.
For purposes of calculating the normalised results, the consolidation entries
are reversed and the Group shares held by the staff share scheme are treated as
issued to parties external to the Group.
Treasury shares: FirstRand shares held by policyholders
Group companies" shares held by Momentum Group and Discovery Life are invested
for the risk and reward of its policyholders, not its shareholders, and
consequently the Group"s shareholders are not exposed to the fair value changes
on these shares. In terms of IAS 32, FirstRand Limited and Discovery Holdings
Limited shares held by Momentum Group and Discovery Life on behalf of
policyholders are deemed to be treasury shares for accounting purposes. The
corresponding movement in the policyholder liabilities is, however not
eliminated, resulting in a mismatch in the overall equity and income statement
of the Group.
Increases in the fair value of Group shares and dividends declared on these
shares increases the liability to policyholders. The increase in the liability
to policyholders is accounted for in the income statement. The increase in
assets held to match the liability position is eliminated.
For purposes of calculating the normalised results, the adjustments described
above are reversed and the Group shares held on behalf of policyholders are
treated as issued to parties external to the Group.
Consolidated income statement for the year ended 30 June
Audited
R million 2006 2005
Net interest income 15 012 13 184
Interest and similar income 30 395 27 505
Interest expense and similar charges (15 383) (14 321)
Impairment losses on loans and advances (1 411) (706)
Net fee and commission income 12 009 9 878
Fee and commission income 14 088 11 835
Fee and commission expense (2 079) (1 957)
Net insurance premium income 6 822 7 423
Insurance premium revenue 7 758 8 111
Premium ceded to reinsurers (936) (688)
Net claims and benefits paid (6 174) (8 861)
Gross claims and benefits paid on (6 875) (9 348)
insurance contracts
Reinsurance recoveries 701 487
Gains from banking and trading activities 4 349 2 187
Gains from investment activities 19 225 16 003
Other operating income 2 268 1 715
Increase in value of policyholder (17 430) (13 447)
liabilities
Fair value adjustments to financial (530) (232)
liabilities
Net operating income 34 140 27 144
Operating expense (20 402) (16 836)
Share of profit of associates and joint 1 290 1 076
venture companies
Income before discontinued operations 15 028 11 384
Loss on disposal of discontinued - (67)
operations
Operating profit before income tax 15 028 11 317
Taxation expense (5 040) (3 610)
Profit for the year 9 988 7 707
Attributable to:
Non-cumulative non-redeemable preference 274 68
shareholders
Equity holders of the parent 8 825 7 137
Minority interest 889 502
9 988 7 707
Earnings per share (cents) 171.6 137.3
Diluted earnings per share (cents) 166.0 134.5
Consolidated balance sheet at 30 June
Audited
R million 2006 2005
Assets
Cash and short-term funds 30 323 24 890
Money market investments 16 361 11 427
Advances 291 076 221 851
Derivative financial instruments 37 934 39 795
Investment securities and investments 173 848 133 763
Commodities 676 439
Investment properties 6 141 4 172
Policy loans on insurance contracts 118 -
Policy loans on investment contracts - 530
Reinsurance assets 292 236
Insurance assets 1 766 1 881
Loans and accounts receivables 6 046 11 548
Investment in associates and joint 5 069 5 707
ventures
Taxation 7 118
Intangibles 4 076 1 178
Property and equipment 5 011 4 610
Deferred taxation 1 043 594
Total assets 579 787 462 739
Shareholders" equity and liabilities
Liabilities
Deposits 317 840 245 793
Short trading positions 25 967 19 919
Derivative financial instruments 22 370 30 264
Creditors and accruals 16 848 23 257
Reinsurance liabilities 24 31
Policyholders" liabilities under 93 720 48 844
investment contracts
Policyholders" liabilities under 40 740 49 001
insurance contracts
Liabilities arising to third parties 1 725 1 027
Deferred revenue liability 248 -
Post retirement funding liability 1 635 1 733
Debentures and long-term liabilities 10 576 5 007
Provisions 2 407 1 567
Taxation liability 1 024 185
Deferred taxation 5 159 3 877
Total liabilities 540 283 430 505
Ordinary share capital and premium 3 635 4 396
Non-cumulative non-redeemable preference 4 519 2 992
shares
Distributable reserves 24 854 20 284
Non distributable reserves 3 522 2 238
Shareholders" equity 36 530 29 910
Minority interest 2 974 2 324
Total shareholders" equity and 579 787 462 739
liabilities
Consolidated cash flows statement for the year ended 30 June
Audited
R million 2006 2005
Cash inflow from operating activities 2 878 6 491
Net cash outflows from investment (282) (11 407)
activities
Poceeds from disposal of investments 273 (10 484)
Net purchase of property and equipment (1 224) (388)
Investment in associates 638 (1 316)
Net purchase of intangible assets (36) (238)
Proceeds on disposal of susbsidiary 67 1 019
Cash flows from financing activities 6 995 2 307
Proceeds from/(repayment of) of long-term 5 469 (693)
liabilities
Proceeds from share issue 1 526 3 000
Net increase/(decrease) in cash and cash 9 591 (2 609)
equivalents
Cash and cash equivalents at the 36 317 40 253
beginning of the year
Cash and cash equivalents at the end of 45 908 37 644
the year
Cash and cash equivalents sold (52) (1 335)
Cash and cash equivalents acquired 828 8
Cash and cash equivalents at the end of 46 684 36 317
the year
Sources of profit for the year ended 30 June
% % %
2006 composition 2005 composition change
Banking Group 7 049 85 5 656 83 25
FNB 3 473 41 2 934 44 18
RMB 1 454 18 1 306 19 11
Wesbank 1 059 13 788 12 34
FNB Africa 377 5 314 4 20
Support 686 8 314 4 >100
Momentum Group 1 534 18 1 270 19 21
Insurance 943 11 672 10 40
operations
Asset management 341 4 243 4 40
operations
Investment income 280 3 355 5 (21)
on shareholders"
assets
Agreement with (30) - - - (>100)
National Treasury
Discovery Group 350 4 324 5 8
FirstRand Limited (164) (2) (304) (5) (46)
Consolidation of (380) (5) (155) (2) -
share trusts
Headline earnings 8 389 100 6 791 100 24
Dividend payment to (274) (68) >100
non-cumulative non-
redeemable
preference
shareholders
Headline earnings 8 115 6 723 21
for the group
Statement of changes in equity for the year ended 30 June
Audited
Ordinary share capital and ordinary shareholders" funds
non-
Total preference redeemable capital
ordinary share Total and Distri- Distri-
Capital holders" share- share butable butable
R million premium reserves reserves interest
Restated balance 1 July 4 396 20 284 2 238 2 324
2005
IFRS adjustments (296) (857) (174) (18)
Restated balance 1 July 4 100 19 427 2 064 2 306
2005
Issue of share capital 165 (165) - 19
Reduction of share - - - -
capital
Share issue expense - - - (4)
Currency translation - - 225 27
differences
Movement in revaluation - - 225 41
reserves
Movement in other - - 19 -
reserves
Earnings attributable to - 8 825 - 889
shareholders
Ordinary dividends - (3 114) - (263)
Preference dividends - - - -
Transfer (to)/from - (184) 184 7
reserves
Effective change of - 69 10 17
shareholding of
subsidiary
Share based payment - (4) 274 (65)
reserve
Consolidation of share (630) - 521 -
trusts
Balance at 30 June 2006 3 635 24 854 3 522 2 974
Non-
cumulative
Share Non- Outside
ordinary distri- share- share-
capital holders" holders" and
holders" R million interest premium funds
Restated balance 1 July 29 242 2 992 32 234
2005
IFRS adjustments (1 345) - (1 345)
Restated balance 1 July 27 897 2 992 30 889
2005
Issue of share capital 19 1 531 1 550
Reduction of share - - -
capital
Share issue expense (4) (4) (8)
Currency translation 252 - 252
differences
Movement in revaluation 266 - 266
reserves
Movement in other 19 - 19
reserves
Earnings attributable to 9 714 274 9 988
shareholders
Ordinary dividends (3 377) - (3 377)
Preference dividends - (274) (274)
Transfer (to)/from 7 - 7
reserves
Effective change of 96 - 96
shareholding of
subsidiary
Share based payment 205 - 205
reserve
Consolidation of share (109) - (109)
trusts
Balance at 30 June 2006 34 985 4 519 39 504
Statement of headline earnings and dividends for the year ended
30 June
Audited
R million 2006 2005 % change
Attributable earnings to ordinary 8 825 7 137 24
shareholders
Headline earnings adjustments (710) (414)
Less: Profit on disposal of equity (219) (406)
accounted private equity associates
Add: Impairment of property and 1 -
equipment
Less: Profit on sale of associates (92) 67
Less: Profit on sale of shares in (37) -
subsidiary
Less: Net asset value in excess of (22) -
purchase price of subsidiaries
Add: Loss on sale of assets 19 7
Less: Profit on sale of available-for- (360) (82)
sale financial assets
Headline earnings 8 115 6 723 21
Earnings per share (cents)
-Basic 171.6 137.3 25
-Diluted 166.0 134.5 23
Headline earnings per share (cents)
-Basic 157.8 129.3 22
-Diluted 152.6 126.7 20
Ordinary dividend per share (cents)
-Interim 32.0 26.6 20
-Final 34.0 28.5 19
Total 66.0 55.1 20
Dividend information
Non-cumulative non-redeemable
preference dividend per share (cents)
"B" preference share
-27 February 2006/28 February 2005 356 228
-28 August 2006/29 August 2005 363 360
Total 719 588
"B1" preference share
-27 February 2006 356 -
-28 August 2006/29 August 2005 363 37
Total 719 37
Ordinary dividends declared 3 718 3 093 20
Non-cumulative non-redeemable 324 177 83
preference share dividends declared
Divisional attributable earnings for
ordinary shareholders
Banking Group 7 260 5 967 22
Momentum Group 1 909 1 341 42
Discovery Group 437 356 23
FirstRand Limited (company) (127) (304) 58
Consolidation of share trusts (383) (155) >100
Dividend paid to non-cumulative non- (274) (68) >100
redeemable preference shareholders
Consolidation of treasury shares: 3 - >100
policyholders
Attributable earnings for the group 8 825 7 137 24
Divisional headline earnings for
ordinary shareholders
Banking Group 7 049 5 656 25
Momentum Group 1 534 1 270 21
Discovery Group 350 324 8
FirstRand Limited (company) (164) (304) 46
Consolidation of Share Trusts (383) (155) >100
Dividend paid to non-cumulative non- (274) (68) >100
redeemable preference shareholders
Consolidation of treasury shares 3 - >100
policyholders
Headline earnings for the group 8 115 6 723 21
Directors
GT Ferreira (Chairman), PK Harris (CEO), VW Bartlett, DJA Craig (British), LL
Dippenaar, DM Falck, PM Goss, NN Gwagwa, MW King, YI Mahomed, G Moloi, AP Nkuna,
SE Nxasana, SEN Sebotsa, KC Shubane, BJ van der Ross, Dr F van Zyl Slabbert, RA
Williams.
Registered office
1st Floor, 4 Merchant Place, 1 Fredman Drive, Sandton
Secretary and registered office
AH Arnott, 4th Floor, 4 Merchant Place, Corner of Fredman Drive and Rivonia
Road, Sandton 2196
Postal Address
PO Box 786273, Sandton, 2146, Telephone: +27 11 282 1808, Telefax: +27 11 282
8088
Web address: www.firstrand.co.za
Sponsor
Rand Merchant Bank, (a division of FirstRand Bank)
additional information is available at www.firstrand.co.za
CERTAIN COMPANIES WITHIN THE FIRSTRAND GROUP ARE AUTHORISED FINANCIAL SERVICES
PROVIDERS
Date: 19/09/2006 08:30:33 AM Produced by the JSE SENS Department
