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FIRSTRAND BANKING GROUP
CONSOLIDATED BALANCE SHEET (UNAUDITED)
31 DECEMBER 31 DECEMBER 30 JUNE
1998 1997 % 1998
R-MILLION R-MILLION CHANGE R-MILLION
SHAREHOLDERS' FUNDS AND LIABILITIES
SHAREHOLDERS' FUNDS
SHARE CAPITAL 106,0 106,0 0,0 106,0
RESERVES 9 417,8 6 732,9 39,9 8 705,2
DEBENTURES AND LONG-TERM
LIABILITIES 380,6 701,3 (45,7) 579,8
OUTSIDE SHAREHOLDERS' INTEREST 163,0 128,1 27,2 151,1
DEFERRED TAXATION 1 147,1 1 385,6 (17,2) 1 101,7
LIABILITIES
DEPOSIT AND CURRENT ACCOUNTS 114,972,7 101 365,0 13,4 117 850,6
CREDITORS AND ACCRUALS 7 610,2 5 792,8 31,4 9 011,3
LIABILITIES TO CLIENTS
UNDER ACCEPTANCES 1 707,4 2 254,6 (24,3) 1 067,4
135 504,8 118 466,3 14,4 138 573,1
ASSETS
LIQUID ASSETS
CASH AND SHORT-TERM FUNDS 9 259,4 6 771,6 36,7 10 186,5
SHORT-TERM NEGOTIABLE SECURITIES 10 473,5 8 152,7 28,5 10 583,1
19 732,9 14 924,3 32,2 20 769,6
OTHER ASSETS
INVESTMENT AND TRADING
SECURITIES 7 514,6 4 814,7 56,1 7 978,6
ADVANCES 96 859,2 87 358,3 10,9 96 613,1
DEBTORS 5 795,7 4 789,7 21,0 8 210,1
ASSOCIATED COMPANIES 65,0 675,2 (90,4) 130,5
OTHER INVESTMENTS 326,7 266,2 22,7 372,3
FIXED ASSETS 3 503,3 3 383,3 3,5 3 431,5
CLIENTS' LIABILITIES
UNDER ACCEPTANCES 1 707,4 2 254,6 (24,3) 1 067,4
135 504,8 118 466,3 14,4 138 573,1
GUARANTEES AND CREDITS 8 058,6 9 785,2 (17,6) 9 603,0
CONSOLIDATED INCOME STATEMENT (UNAUDITED)
SIX MONTHS ENDED YEAR ENDED
31 DECEMBER 31 DECEMBER 30 JUNE
1998 1997 % 1998
R-MILLION R-MILLION CHANGE R-MILLION
INTEREST INCOME 10 416,2 7 969,1 30,7 15 970,4
INTEREST EXPENDITURE (8 111,2) (5 981,8) 35,6 (12 035,0)
NET INTEREST INCOME 2 305,0 1 987,3 16,0 3 935,4
CHARGE FOR BAD AND
DOUBTFUL DEBTS (558,0) (476,7) 17,1 (1 159,5)
1 747,0 1 510,6 15,6 2 775,9
OTHER OPERATING INCOME 2 322,1 1 810,7 28,2 4 045,3
NET INTEREST AND OTHER OPERATING
INCOME 4 069,1 3 321,3 22,5 6 821,2
OTHER OPERATING EXPENDITURE (2 845,6) (2 331,4) 22,1 (4 981,4)
BANKING INCOME BEFORE TAXATION 1 223,5 989,9 23,6 1 839,8
NET NON-BANKING INCOME BEFORE
TAXATION 53,6 28,2 90,1 77,8
INCOME BEFORE TAXATION 1 277,1 1 018,1 25,4 1 917,6
TAXATION (388,9) (340,0) 14,4 (593,3)
INCOME AFTER TAXATION 888,2 678,1 31,0 1 324,3
EQUITY ACCOUNTED EARNINGS 3,1 6,6 (53,0) 15,9
NET INCOME 891,3 684,7 30,2 1 340,2
EARNINGS ATTRIBUTABLE TO
OUTSIDE SHAREHOLDERS (25,3) (18,8) 34,6 (37,6)
EARNINGS ATTRIBUTABLE TO
ORDINARY SHAREHOLDERS 866,0 665,9 30,0 1 302,6
KEY RATIOS
- CAPITAL ADEQUACY
- TIER 1 8,3% 7,0% 7,7%
- TIER 2 2,5% 3,4% 2,5%
- TOTAL 10,8% 10,4% 10,2%
- RETURN ON AVERAGE EQUITY 21,4% 19,6% 19,3%
- NET INTEREST MARGIN 3,4% 3,4% 3,1%
- BAD DEBT CHARGE TO ADVANCES 1,15% 1,2% 1,29%
- NON-INTEREST REVENUE TO
TOTAL INCOME 50,2% 47,7% 50,7%
- NON-INTEREST COST TO
TOTAL INCOME 61,5% 61,4% 62,4%
COMMENTARY
INTRODUCTION
SINCE THE MERGER ON 1 APRIL 1998 OF THE FINANCIAL SERVICES INTERESTS OF ANGLO
AMERICAN CORPORATION OF SOUTH AFRICA LIMITED AND RMB HOLDINGS LIMITED THE
ACTIVITIES OF THE GROUP HAVE BEEN CONSOLIDATED INTO TWO DISTINCT SUB GROUPS.
THE FIRSTRAND BANKING GROUP COMPRISES FIRST NATIONAL BANK HOLDINGS LIMITED
("FNBH") AND RAND MERCHANT BANK LIMITED ("RMB"), WHILE THE FIRSTRAND INSURANCE
GROUP COMPRISES THE INSURANCE ACTIVITIES OF MOMENTUM LIFE ASSURERS LIMITED
("MOMENTUM LIFE") AND THE SOUTHERN LIFE ASSOCIATION LIMITED ("SOUTHERN LIFE")
AND THEIR RELATED ASSET MANAGEMENT ACTIVITIES, AS WELL AS THE OPERATIONS OF
DISCOVERY HEALTH LIMITED, THE GROUP'S HEALTH INSURANCE COMPANY.
THIS REPORT COVERS THE ACTIVITIES OF THE FIRSTRAND BANKING GROUP. THE MINISTER
OF FINANCE HAS APPROVED THE ESTABLISHMENT OF A SINGLE BANKING ENTITY TO BE
CALLED FIRSTRAND BANK LIMITED. THE OPERATIONS OF FNB AND RMB WILL BE COMBINED
BEFORE THE END OF THE FINANCIAL YEAR, WHILE THE RESPECTIVE POWERFUL BRAND NAMES
WILL BE RETAINED. IN THE INTERIM THE BANK IS OPERATING AS A SINGLE ENTITY USING
CROSS GUARANTEES.
ECONOMIC ENVIRONMENT TURMOIL IN INTERNATIONAL AND, IN PARTICULAR, EMERGING
MARKETS IMPACTED SIGNIFICANTLY ON THE SOUTH AFRICAN ECONOMY AND LOCAL FINANCIAL
MARKETS. THE RESERVE BANK'S DECISION TO DEFEND THE RAND IN THE LIGHT OF THIS
RESULTED IN A STEEP INCREASE IN INTEREST RATES, WHICH IN TURN LED TO A SLOW
DOWN IN GROWTH IN THE ECONOMY. THE JSE ALL SHARE INDEX FELL BY 37% FROM A HIGH
IN JULY 1998 TO A LOW IN SEPTEMBER 1998, AND SUBSEQUENTLY RECOVERED SOME 15,5%
BY THE END OF DECEMBER 1998.
AS A RESULT, IN THE THIRD QUARTER OF 1998, INTEREST MARGINS IN THE BANKING
GROUP WERE SEVERELY SQUEEZED. WHILE PRIME OVERDRAFT RATES DROPPED FROM A HIGH
OF 25,5% TO 23% AT THE END OF DECEMBER 1998, THE CONTINUING HIGH REAL INTEREST
RATES HAVE PLACED CONSUMERS UNDER CONSIDERABLE PRESSURE. THIS IN TURN HAS
IMPACTED ON THE GROWTH OF ADVANCES. SUBSEQUENT TO DECEMBER, RATES HAVE
CONTINUED TO DECLINE, AND THE PRIME OVERDRAFT RATE IS CURRENTLY 20%, THEREBY
FURTHER EASING PRESSURE ON THE CONSUMER.
THE INCREASED VOLATILITY IN THE FINANCIAL MARKETS DID HOWEVER OFFER SUBSTANTIAL
OPPORTUNITIES FOR THE GROUP'S MERCHANT BANKING OPERATIONS. RISK MANAGEMENT HAS
ALWAYS BEEN A KEY FOCUS OF RMB AND ROBUST AND REAL TIME RISK MANAGEMENT
SYSTEMS, COMBINED WITH A CONSERVATIVE MANAGEMENT APPROACH POSITIONED THE
MERCHANT BANKING OPERATIONS TO SUCCESSFULLY WEATHER THE VOLATILE MARKETS, WHILE
FULLY EXPLOITING THE TRADING OPPORTUNITIES THAT ADDED VOLATILITY OFFERED.
FINANCIAL OVERVIEW
THE RESULTS FOR THE SIX MONTHS TO 31 DECEMBER 1998 ARE NOT DIRECTLY COMPARABLE
WITH THOSE OF THE PREVIOUS ACCOUNTING PERIODS. THE FIGURES REFLECTED IN THE
INCOME STATEMENT AND BALANCE SHEET ARE AN AGGREGATION OF THE ACCOUNTS OF FNBH
AND RMB. ON 30 SEPTEMBER 1998 FNB RECEIVED R2 183 MILLION FROM THE FIRSTRAND
RIGHTS ISSUE PROCEEDS FOR THE SALE OF ITS INVESTMENT IN SOUTHERN LIFE. IN
ADDITION RMB RECEIVED A CAPITAL INJECTION OF R200 MILLION.
EARNINGS ATTRIBUTABLE TO SHAREHOLDERS TOTALLED R866,0 MILLION COMPARED WITH
R665,9 MILLION FOR THE SAME PERIOD IN THE PREVIOUS YEAR, WHICH REPRESENTS AN
INCREASE OF 30%. IF INTEREST EARNED ON THE ADDITIONAL CAPITAL IS EXCLUDED FOR
THE PERIOD, EARNINGS REFLECT A PRO-FORMA INCREASE OF 20% COMPARED TO THE 30%
INCREASE IN THE ATTRIBUTABLE EARNINGS FOR THE SIX MONTH PERIOD THAT INCLUDE THE
INTEREST EARNED. THE FIRSTRAND CONSOLIDATED INCOME STATEMENT AS AT 31 DECEMBER
1998 DISCLOSED EARNINGS FROM BANKING OPERATIONS OF R846 MILLION. THE DIFFERENCE
ARISES FROM THE ALLOCATION OF BANKING EARNINGS TO THE LIFE GROUP IN RESPECT OF
SOUTHERN LIFE'S INVESTMENT IN FNBH AND THE ALLOCATION BY FIRSTRAND LTD OF
INTEREST EARNED ON THE RIGHTS ISSUE PROCEEDS TO THE BANKING GROUP. THE EFFECTS
OF THESE NET ADJUSTMENTS ARE SUMMARISED BELOW:
SIX MONTHS ENDED
31 DECEMBER 31 DECEMBER
1998 1997
R-MILLION R-MILLION % INCREASE
NET INCOME ATTRIBUTABLE
TO SHAREHOLDERS 866 666 30
NET ADJUSTMENTS (20) 40
NET INCOME ATTRIBUTABLE TO
FIRSTRAND SHAREHOLDERS FROM
BANKING OPERATIONS 846 706 20
THE RETAIL BANK'S OPERATING PROFIT FOR THE PERIOD UNDER REVIEW WAS AHEAD OF
EXPECTATIONS. THIS IS PARTICULARLY PLEASING IN THE LIGHT OF THE PRESSURE ON
INTEREST MARGINS EXPERIENCED DURING THE FIRST QUARTER OF THE NEW FINANCIAL
YEAR. THE GROUP'S MERCHANT BANKING TRADING OPERATIONS HAVE PROSPERED FROM
MARKET VOLATILITY PREVAILING DURING THE PERIOD UNDER REVIEW.
THE FORMATION OF FIRSTRAND BANK LIMITED WILL ENABLE MANAGEMENT TO REVIEW THE
GREATER GROUP'S OPTIMAL CAPITAL STRUCTURE AND THEREBY ENSURE MAXIMUM RETURNS TO
SHAREHOLDERS. THE BANKING GROUP'S CAPITAL ADEQUACY RATIO IS 10,8% COMPARED WITH
10,2% AT 30 JUNE 1998. THE PRESENT RELATIVELY HIGH TIER 1 CAPITAL RATIO IS THE
RESULT OF THE SURPLUS OF APPROXIMATELY R1,7 BILLION ARISING FROM THE SALE OF
SOUTHERN LIFE. ACCORDINGLY THE OPTIMAL CAPITAL ALLOCATION IS BEING REVIEWED,
AND THE POSSIBILITY OF RAISING ADDITIONAL TIER 2 CAPITAL IS BEING INVESTIGATED,
IN ORDER TO MAXIMISE RETURNS TO SHAREHOLDERS.
INTEREST INCOME INCREASED BY 30,7% WHILE INTEREST EXPENDITURE INCREASED BY
35,6% RESULTING IN AN INCREASE IN NET INTEREST INCOME OF 16,0%. THE TURMOIL IN
INTERNATIONAL MARKETS REFERRED TO ABOVE RESULTED IN A RAPID INCREASE IN
INTEREST RATES DURING THE FIRST THREE MONTHS OF THE PERIOD UNDER REVIEW CAUSING
INTEREST MARGINS TO COME UNDER PRESSURE. THE DECLINE IN INTEREST RATES DURING
THE SECOND THREE MONTHS HAS HOWEVER RESULTED IN MARGINS IMPROVING.
THE CHARGE FOR BAD AND DOUBTFUL DEBTS INCREASED BY 17,1% TO R558,0 MILLION
REFLECTING THE CONTINUED IMPACT OF VERY HIGH REAL RATES OF INTEREST ON
BORROWERS. AS AT 31 DECEMBER 1998 BALANCE SHEET PROVISIONS EXPRESSED AS A
PERCENTAGE OF ADVANCES AMOUNTED TO A SOUND 2,5% (DECEMBER 1997 - 2,37%). THIS
EXCLUDES THE ADDITIONAL DISCRETIONARY R600 MILLION GENERAL PROVISION CREATED AT
THE TIME OF THE MERGER, DEEMED PRUDENT IN THE LIGHT OF TURMOIL IN THE FINANCIAL
MARKETS AND THE CONSEQUENTIAL PRESSURE ON BORROWERS. WHILST NORMALITY IN THE
FINANCIAL MARKETS HAS LARGELY BEEN RESTORED, IT IS PLEASING THAT THIS
DISCRETIONARY PROVISION HAS NOT HAD TO BE ACCESSED. THE LEVEL OF PROVISIONING,
INCLUDING THE R600 MILLION, AMOUNTS TO 3,04%., MANAGEMENT IS SATISFIED THAT THE
CURRENT LEVEL OF PROVISIONING IS MORE THAN ADEQUATE.
OTHER OPERATING INCOME ROSE BY 28,2% TO R2 322,1 MILLION AND NOW REPRESENTS
50,2% OF TOTAL INCOME MAKING THE GROUP LESS DEPENDENT ON INTEREST MARGIN THAN
OUR PEERS. TRADING INCOME FROM TREASURY AND MERCHANT BANKING ACTIVITIES
ACCOUNTED FOR A SUBSTANTIAL PORTION OF THE INCREASE.
THE INCREASE IN OPERATING EXPENDITURE OF 22,1% TO R2 845,6 MILLION INCLUDES
NON-RECURRING COMPUTER EXPENDITURE (R120,5 MILLION) AND PROFESSIONAL FEES
(R106,9 MILLION) INCURRED IN RELATION TO BUSINESS TRANSFORMATION. A FURTHER R26
MILLION OF THE INCREASE IN OPERATING EXPENDITURE IS ATTRIBUTABLE TO THE FALL IN
THE RAND AGAINST THE TRADING CURRENCIES OF FIRSTRAND INTERNATIONAL AND R45
MILLION IS ATTRIBUTABLE TO START UP EXPENSES RELATING TO NEW OPERATIONS WHICH
WERE EXPENSED DURING THE PERIOD IN LINE WITH GROUP ACCOUNTING POLICIES. IF
THESE ITEMS ARE EXCLUDED, THE INCREASE WOULD HAVE BEEN 13,7%. THE BANK'S COST
TO INCOME RATIO STANDS AT 61,5%. MANAGEMENT IS CONFIDENT THAT THE STRATEGY OF
BREAKING THE BANKING GROUP INTO SMALLER, EMPOWERED, STAND-ALONE BUSINESS UNITS
WILL CREATE OPPORTUNITIES TO SIGNIFICANTLY IMPROVE EFFICIENCY RATIOS.
NET NON-BANKING INCOME BEFORE TAXATION ROSE FROM R28,2 MILLION TO R53,6 MILLION
ON THE BACK OF GOOD INCOME FROM INSURANCE ACTIVITIES.
REVIEW OF MERGER PROGRESS
THE BANKING GROUP'S ABILITY TO USE CROSS GUARANTEES HAS ENABLED IT TO OPERATE
AS A SINGLE ENTITY.
THE FNB "BUILD A BETTER BANK" TRANSFORMATION STRATEGY INVOLVING THE
ESTABLISHMENT OF EMPOWERED STAND-ALONE BUSINESS UNITS, EACH OF WHICH IS
SEPARATELY MEASURABLE AND FULLY ACCOUNTABLE, HAS BEEN GIVEN IMPETUS BY THE
FIRST RAND PHILOSOPHY OF "CHUNKING" INTO FOCUSSED PROFIT CENTRES. WITH THE
EMPHASIS ON IMPROVED CUSTOMER SERVICE AND INCREASED PROFITABILITY A LARGE
NUMBER OF POTENTIAL PROFIT CENTRES HAVE BEEN IDENTIFIED. MANAGEMENT AND STAFF
ARE EMBRACING THE FIRSTRAND BUSINESS PHILOSOPHY OF AN OWNER MANAGER CULTURE. IT
IS THE INTENTION TO FURTHER IMPROVE THE METHOD OF ALLOCATING CAPITAL, REVENUE
AND COSTS TO THE PROFIT CENTRES, THEREBY ENSURING THAT LOSS MAKING ACTIVITIES
ARE IDENTIFIED EARLY AND PROFITABLE ONES ARE DEVELOPED.
THE MERGER OF RMB AND FNB'S CORPORATE AND INVESTMENT BANKING GROUP IS NOW
COMPLETE RESULTING IN INCREASED CAPACITY. THIS HAS RESULTED IN OPPORTUNITIES TO
PROVIDE QUALITY PRODUCTS AND SERVICES TO THE FNB CORPORATE BANK CLIENT BASE.
THE GROUP'S INTERNATIONAL OPERATIONS ARE CONTROLLED VIA FIRSTRAND
INTERNATIONAL. GOOD PROGRESS IS BEING MADE IN EXPANDING THE MERCHANT AND
INVESTMENT BANKING ACTIVITIES OF THE GROUP. THE HENRY ANSBACHER GROUP IS IN THE
PROCESS OF BEING TRANSFORMED FROM A UK-BASED CORPORATE BANK WITH OFFSHORE
CAPABILITIES TO A PRIVATE AND SPECIALIST BANK GROUP. THE INTENTION IS TO
ASSOCIATE THE ANSBACHER NAME WITH THE FNB PRIVATE BANK.
YEAR 2000 COMPLIANCE
THE YEAR 2000 PROJECT TEAMS THROUGHOUT THE GROUP ARE ON TARGET IN ENSURING THAT
ALL MISSION CRITICAL ACCOUNTING AND OPERATIONAL SYSTEMS SITUATED IN THE MAJOR
BUSINESS UNITS IN THE GROUP ARE YEAR 2000 COMPLIANT BY 30 JUNE 1999, ALL BUT
TWO MISSION CRITICAL SYSTEMS ARE LIVE AND TESTING WILL CONTINUE FOR THE REST OF
THE YEAR.
ALL COSTS ASSOCIATED WITH YEAR 2000 COMPLIANCE ARE BEING FUNDED FROM CASH FLOW
GENERATED FROM OPERATIONS AND ARE BEING CHARGED EITHER AGAINST A PROVISION
CREATED IN PRIOR YEARS, OR ARE EXPENSED AS INCURRED, WHERE THESE COSTS ARE
CONSIDERED NOT TO BE MATERIAL.
PROSPECTS
WHILE THE MARKET HAS STABILISED SINCE 31 DECEMBER 1998, GLOBAL EVENTS CONTINUE
TO FOSTER A CLIMATE OF UNCERTAINTY. THE FORMATION OF THE SINGLE BANKING ENTITY
AND RESTRUCTURING OF THE DIVISIONS CREATE EXCITING OPPORTUNITIES.
THE OUTLOOK FOR THE REST OF THE FINANCIAL YEAR IS ONE OF CAUTIOUS OPTIMISM AND
MANAGEMENT IS CONFIDENT THAT THE INTRODUCTION OF THE FIRSTRAND BUSINESS
PHILOSOPHY INTO THE ENLARGED GROUP WILL CREATE A COMPETITIVE ADVANTAGE TO THE
LONG-TERM BENEFIT OF ALL STAKEHOLDERS.
WE ARE CONFIDENT, GIVEN GROUNDWORK DONE AND OUR ACHIEVEMENTS TO DATE, THAT
SIGNIFICANT VALUE WILL BE UNLOCKED.
PAUL HARRIS VIV BARTLETT
CHIEF EXECUTIVE OFFICER CHIEF EXECUTIVE OFFICER
RAND MERCHANT BANK LIMITED FIRST NATIONAL BANK OF
SOUTHERN AFRICA LIMITED
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