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FIRSTRAND LIMITED
REGISTRATION NUMBER 66/10753/06
RESULTS ANNOUNCEMENT FOR THE YEAR ENDED 30 JUNE 1999
("THE FIRSTRAND GROUP")
- INCREASE ON PRO FORMA HEADLINE EARNINGS +32%
- INCREASE IN HEADLINE EARNINGS PER SHARE +65%
- INCREASE IN DIVIDENDS PER SHARE +49%
INTRODUCTION
FIRSTRAND LIMITED (FIRSTRAND) IS THE HOLDING COMPANY OF A GROUP OF COMPANIES
OPERATING IN THE FINANCIAL SERVICES INDUSTRY. THE OPERATIONS OF THE GROUP ARE
CONSOLIDATED UNDER TWO GROUPS - THE FIRSTRAND INSURANCE GROUP, WHICH INCLUDES
ASSET MANAGEMENT, LIFE AND HEALTH INSURANCE RELATED ACTIVITIES AND FIRSTRAND
BANKING GROUP WHERE OPERATIONS INVOLVE RETAIL, MERCHANT AND CORPORATE BANKING.
DETAILS OF THE OPERATING AND FINANCIAL RESULTS OF THE FIRSTRAND INSURANCE GROUP
AND FIRSTRAND BANKING GROUP ARE DISCLOSED IN SEPARATE REPORTS WHICH SHOULD BE
READ IN CONJUNCTION WITH THIS REPORT.
GROUP STRUCTURE
DURING THE YEAR UNDER REVIEW, MANAGEMENT CONTINUED TO FINALISE THE APPROPRIATE
LEGAL STRUCTURE TO EXPLOIT THE OPPORTUNITIES WHICH WILL FLOW FROM THE TREND
TOWARDS CONVERGENCE OF PRODUCTS AND SERVICES IN THE FINANCIAL SERVICES
INDUSTRY. THESE ACTIVITIES INCLUDED THE APPROPRIATE ALLOCATION OF CAPITAL
BETWEEN THE INSURANCE AND BANKING GROUPS AND THE REMOVAL OF THE LAST OF THE
CROSSHOLDINGS.
DURING THE YEAR THE MINISTER OF FINANCE APPROVED THE ESTABLISHMENT OF A SINGLE
BANKING ENTITY CALLED FIRSTRAND BANK LIMITED. THE PRIMARY OPERATIONS OF FIRST
NATIONAL BANK (FNB) AND RAND MERCHANT BANK (RMB) WERE COMBINED, WITHIN THIS NEW
ENTITY WITH EFFECT FROM 30 JUNE 1999.
THE FINANCIAL SERVICES BOARD HAS APPROVED, IN PRINCIPLE, THE MERGING OF THE
OPERATIONS OF MOMENTUM LIFE ASSURERS LIMITED (MOMENTUM) AND THE SOUTHERN LIFE
ASSOCIATION LIMITED (SOUTHERN) TO FORM FIRSTRAND INSURANCE LIMITED.
FIRSTRAND WILL RETAIN AND LEVERAGE OFF THE GROUP'S STRONG OPERATING BRANDS IN
THE MARKETS WHERE THEY ARE APPROPRIATE.
OF THE R5,1 BILLION RAISED BY WAY OF A RIGHTS ISSUE, BY FIRSTRAND AT THE TIME
OF THE MERGER, APPROXIMATELY R3,0 BILLION HAS BEEN ALLOCATED TO THE INSURANCE
GROUP TO ELIMINATE THE CROSSHOLDINGS BETWEEN SOUTHERN AND FNB HOLDINGS. OF THE
BALANCE, R1,7 BILLION WAS USED TO PURCHASE 40% OF RMB FROM THE MOMENTUM
POLICYHOLDERS, AND R0,4 BILLION WAS INVESTED IN THE BANKING GROUP.
DIAGRAMS ILLUSTRATING THE NEW STRUCTURE ARE INCLUDED WITH THIS REPORT AND THOSE
OF THE BANKING AND INSURANCE GROUPS. A FEATURE OF THE GROUP'S CORPORATE AND
MANAGEMENT STRUCTURE IS THAT
- IT LARGELY ELIMINATES THE LIMITATIONS IMPOSED ON OPERATIONS BY MINORITY
SHAREHOLDERS
- IT ALLOWS THE GROUP TO OPTIMISE THE OPPORTUNITIES THAT ARISE FROM THE TREND
TO CONVERGENCE IN THE FINANCIAL SERVICES INDUSTRY
- IT LEVERAGES THE GROUP'S UNIQUE COMBINATION OF INTELLECTUAL KNOW-HOW AND
SKILLS OVER A BROAD SPECTRUM OF FINANCIAL SERVICES AND PRODUCTS.
ECONOMIC ENVIRONMENT
THE RESULTS OF THE GROUP IN ITS FIRST FULL YEAR OF TRADING AFTER THE MERGER
SHOULD BE SEEN AGAINST THE BACKGROUND OF AN EXTERNAL ENVIRONMENT INFLUENCED BY
EVENTS IN GLOBAL FINANCIAL MARKETS AND INTERNALLY BY THE DEMANDS IMPOSED BY THE
MERGER.
THE COLLAPSE OF THE EQUITY MARKET DURING THE FIRST HALF OF THE FINANCIAL YEAR
IMPACTED THE INSURANCE GROUP'S EARNINGS, WHERE EARNINGS ARE STRONGLY INFLUENCED
BY THE VALUE OF ASSETS UNDER MANAGEMENT.
THE RESULTS OF THE BANKING GROUP WERE NEGATIVELY IMPACTED, WHEN DOMESTIC
INTEREST RATES WERE INCREASED SUBSTANTIALLY IN RESPONSE TO THE EXTERNAL
ENVIRONMENT. THIS PLACED BUSINESS AND CONSUMERS UNDER SEVERE PRESSURE, LEADING
TO AN INCREASE IN BAD DEBTS AND SUBSTANTIALLY DAMPENING DEMAND FOR CREDIT.
MARKET VOLATILITY DID, HOWEVER, CREATE OPPORTUNITIES FOR TRADING DIVISIONS OF
RMB.
AGAINST THIS BACKGROUND, THE RESULTS FOR THE YEAR UNDER REVIEW ARE REGARDED AS
EXCELLENT.
COMMENT ON THE FINANCIAL RESULTS OF FIRSTRAND
AFTER TAX EARNINGS FOR THE FIRSTRAND GROUP INCREASED FROM R688 MILLION TO R2
489 MILLION. HEADLINE EARNINGS PER SHARE INCREASED BY 65% FROM 27,6 CENTS PER
SHARE TO 45,6 CENTS PER SHARE.
THE 1998 RESULTS ARE NOT DIRECTLY COMPARABLE BECAUSE EARNINGS FROM FNB AND
SOUTHERN WERE ONLY INCLUDED FOR THE THREE MONTHS FROM 1 APRIL TO 30 JUNE 1998.
IN ORDER TO AFFORD A MORE MEANINGFUL COMPARISON, PRO FORMA COMPARATIVE FIGURES
HAVE BEEN CALCULATED IN RESPECT OF THE YEAR ENDED 30 JUNE 1998. THESE PRO FORMA
FIGURES COMPRISE AUDITED FINANCIAL INFORMATION FOR THE MOMENTUM LIFE GROUP AND
UNAUDITED FINANCIAL INFORMATION FOR THE SOUTHERN LIFE AND FNB HOLDINGS GROUPS.
THE FIGURES ASSUME THAT THE BALANCE OF THE RIGHTS ISSUE PROCEEDS EARNED 10% PER
ANNUM AFTER TAX.
THE TOTAL GROUP HEADLINE EARNINGS AMOUNTED TO R2 482 MILLION WHICH IS A 32%
INCREASE COMPARED TO THE TOTAL PRO FORMA HEADLINE EARNINGS OF R1 874 MILLION
FOR 1998. THIS TRANSLATES TO HEADLINE EARNINGS PER SHARE OF 45,6 CENTS AND PRO
FORMA EARNINGS OF 34,4 CENTS PER SHARE.
OF THE TOTAL EARNINGS OF FIRSTRAND, 75% IS IN RESPECT OF BANKING OPERATIONS AND
25% IN RESPECT OF INSURANCE AND RELATED OPERATIONS.
COMMENT ON THE FINANCIAL RESULTS OF FIRSTRAND BANKING GROUP
THE BANKING GROUP PERFORMED WELL NOTWITHSTANDING THE DIFFICULT ECONOMIC
ENVIRONMENT.
HEADLINE EARNINGS OF THE BANKING GROUP INCREASED TO R1 898 MILLION FOR THE YEAR
ENDED 30 JUNE 1999.
NOTABLE HIGHLIGHTS OF THE 1999 RESULTS ARE:
- THE OUTSTANDING PERFORMANCE OF VIRTUALLY ALL DIVISIONS OF RMB
- A STRONG PERFORMANCE BY WESBANK WHICH INCREASED ITS PROFITS AND MARKET SHARE
SIGNIFICANTLY DESPITE AN ENVIRONMENT OF DECLINING NEW CAR SALES AND INCREASED
INTEREST RATES
- A COMMENDABLE PROFIT IMPROVEMENT FROM RETAIL BANKING OPERATIONS DESPITE POOR
DEMAND FOR CREDIT, INCREASED BAD DEBTS AND THE DEMANDS OF THE TRANSFORMATION
AND RESTRUCTURING INITIATIVES AFTER THE MERGER.
COMMENT ON THE FINANCIAL RESULTS OF FIRSTRAND INSURANCE GROUP
THE PROFIT RECOGNITION APPROACH AND METHODOLOGY OF SOUTHERN WAS ALIGNED WITH
THE MORE CONSERVATIVE PROFIT RECOGNITION APPROACH USED FOR MOMENTUM. AN
EMBEDDED VALUE CALCULATION WAS ALSO PERFORMED FOR THE FIRST TIME FOR MOMENTUM
AND SOUTHERN AS AT 30 JUNE 1999. THE EMBEDDED VALUE FIGURES, TOGETHER WITH THE
DISCLOSURE OF ADDITIONAL INFORMATION IN THE INSURANCE GROUP'S PROFIT
ANNOUNCEMENT, WILL ALLOW SHAREHOLDERS TO GAIN A BETTER INSIGHT INTO THE
PROGRESS AND FUTURE PROSPECTS OF THE INSURANCE OPERATION.
AT THE OPERATIONAL LEVEL, THE INSURANCE GROUP IMPROVED ITS EARNINGS BY 73%.
INDIVIDUAL LIFE, EMPLOYEE BENEFITS, ASSET, MANAGEMENT AND HEALTH INSURANCE ALL
ACHIEVED SIGNIFICANT IMPROVEMENTS IN THEIR OPERATING PROFITS. HEADLINE EARNINGS
OF THE INSURANCE GROUP AMOUNTED TO R631 MILLION.
THE NOTABLE FEATURES OF THE RESULTS OF THE INSURANCE GROUP ARE:
- FUNDS RECEIVED FROM CLIENTS INCREASED STRONGLY BY 31% TO R33 BILLION
- ANNUAL SUSTAINABLE COST SAVINGS ARE PROJECTED TO TOTAL R260 MILLION
- THE EMBEDDED VALUE OF NEW INSURANCE AND HEALTH BUSINESS WRITTEN DURING THE
YEAR TOTALLED AN IMPRESSIVE R311 MILLION
OPERATIONAL OBJECTIVES
IT REMAINS THE INTENTION OF FIRSTRAND THAT ITS ROLE SHOULD BE THAT OF STRATEGIC
ENABLER THEREBY ENSURING THAT THE WHOLE IS GREATER THAN THE SUM OF THE PARTS.
DURING THE YEAR UNDER REVIEW THE FIRSTRAND EXECUTIVE COMMITTEE FOCUSED ON A
NUMBER OF IMPORTANT ISSUES:
FIRSTLY, PROCEDURES WERE PUT INTO PLACE TO MIGRATE THE FIRSTRAND BUSINESS
PHILOSOPHY INTO THE GROUP. IN ESSENCE THIS PHILOSOPHY INVOLVES STRUCTURING THE
MAJOR COMPANIES INTO PROFIT CENTRES AND GROUPING THESE CENTRES INTO SYNERGISTIC
CLUSTERS. IT ALSO INVOLVES THE MOVEMENT AWAY FROM A CENTRALISED MANAGEMENT
STRUCTURE TO AN ENVIRONMENT CHARACTERISED BY DECENTRALISED DECISION MAKING,
ACCOUNTABILITY AND AN ENTREPRENEURIAL SPIRIT. PROFIT CENTRES ARE CHARGED FOR
THE CAPITAL REQUIRED. THE SPREADING OF THIS PHILOSOPHY THROUGHOUT THE
RESTRUCTURED GROUP WAS DONE USING WORKSHOPS AND IN THE CASE OF THE BANK,
SATELLITE TV BROADCASTS TO 30 000 EMPLOYEES. OPPORTUNITIES FOR SUBSTANTIAL
IMPROVEMENTS IN OPERATIONAL EFFICIENCIES ARE BECOMING APPARENT AS THE BUSINESS
PHILOSOPHY BEGINS TO MAKE AN IMPACT.
SECONDLY, MANAGEMENT CHANGES WERE MADE TO ENSURE THAT THE LEADERSHIP QUALITIES
AND SKILLS OF THE SENIOR MANAGEMENT TEAMS IN THE DIFFERENT BUSINESS UNITS ARE
APPROPRIATE TO IMPLEMENT THE STRATEGIC VISION OF THE BUSINESS UNITS.
IN ORDER TO EXPLOIT THE CONVERGENCE OF BANKING, INSURANCE AND ASSET MANAGEMENT,
THE FIRSTRAND EXECUTIVE COMMITTEE DECIDED THAT IT WAS MORE IMPORTANT TO BUILD
THE RIGHT FOUNDATION FOR LEVERAGING THE SALE OF FINANCIAL PRODUCTS ACROSS THE
EXISTING DISTRIBUTION BUSINESSES. THEREFORE, A CONSIDERABLE AMOUNT OF TIME WAS
SPENT ON CREATING THE RIGHT AWARENESS AND INTEGRATING THE PLANS OF THE BANKING
AND INSURANCE GROUPS TO FACILITATE CROSS-MARKETING IN THE FUTURE.
NEW VENTURES
THE FIRSTRAND GROUP PRIDES ITSELF IN HAVING A PROVEN STRATEGIC CAPABILITY OF
SUCCESSFULLY STARTING GRASSROOTS OPERATIONS AND ADAPTING TO NEW PARADIGMS IN
THE FINANCIAL SERVICES INDUSTRY WITH RELATIVELY MODEST AMOUNTS OF CAPITAL.
HISTORICALLY THESE NEW VENTURES HAVE PROVED TO BE SIGNIFICANT CONTRIBUTORS TO
EARNINGS GROWTH OVER TIME. DISCOVERY HEALTH, SHORTLY TO BE LISTED ON THE
JOHANNESBURG STOCK EXCHANGE, IS A CASE IN POINT.
MOMENTUM ADMINISTRATION SERVICES (MAS), THE HIGHLY SUCCESSFUL UNIT TRUST LINKED
PRODUCT PACKAGER, HAS LAUNCHED A LOOK-ALIKE OPERATION IN THE UK IN PARTNERSHIP
WITH HENRY ANSBACHER, THE GROUP'S WHOLLY OWNED PRIVATE BANKING OPERATION. THE
NEW VENTURE WILL INITIALLY LEVERAGE OFF THE CLIENT BASE OF HENRY ANSBACHER AND
IS BUDGETED TO BREAK EVEN AFTER THREE YEARS. THE SEED CAPITAL EARMARKED FOR
THIS NEW VENTURE IS GBP2 MILLION (R20 MILLION).
DISCOVERY HEALTH, SOUTH AFRICA'S LEADING HEALTH INSURER IN WHICH THE GROUP HAS
A 65% SHAREHOLDING, IS ENTERING THE US MARKET BECAUSE IT OFFERS ATTRACTIVE
OPPORTUNITIES FOR THE COMPANY'S ABILITIES, PRODUCTS AND TECHNOLOGY. THE
START-UP CAPITAL APPROVED FOR THIS NEW VENTURE IS US$7 MILLION (R42 MILLION).
YEAR 2000 COMPLIANCE
CRITICAL OPERATIONAL SYSTEMS IN THE GROUP'S BANKING AND INSURANCE ACTIVITIES
HAVE BEEN AND ARE BEING EXTENSIVELY TESTED. MOST OF THESE CHANGES ARE ALREADY
IN THE LIVE ENVIRONMENT. A SYSTEM CHANGE FREEZE FROM MID-1999 HAS ENABLED THE
RIGOROUS TESTING REQUIRED TO GIVE CONFIDENCE TO THE BANKING GROUP. IN THE
INSURANCE GROUP, THE SOUTHERN SYSTEMS ARE BEING CONVERTED TO THOSE OF MOMENTUM.
THIS WILL RESULT IN CERTAIN MISSION CRITICAL SYSTEMS BEING FINALISED DURING THE
FINAL QUARTER OF 1999.
COSTS ASSOCIATED WITH THE YEAR 2000 PROJECT HAVE BEEN EXPENSED IN THE CURRENT
YEAR OR CHARGED AGAINST PROVISIONS ESTABLISHED FOR THIS PURPOSE.
EVERY EFFORT HAS BEEN MADE TO ENSURE THAT BUSINESS PARTNERS HAVE TAKEN ADEQUATE
STEPS TO ENSURE THAT THEIR SYSTEMS ARE COMPLIANT. THE GROUP HAS CONTRIBUTED
BOTH FINANCIALLY AND IN TERMS OF HUMAN RESOURCES TO HELPING GOVERNMENT AND
LOCAL AUTHORITIES WITH THEIR COMPLIANCE REQUIREMENTS.
PROSPECTS
THE RESTRUCTURING OF THE RETAIL BANK IS EXPECTED, OVER THE MEDIUM TERM, TO
UNLOCK HUMAN POTENTIAL, IMPROVE EFFICIENCY RATIOS, ELIMINATE LOSS MAKING
ACTIVITIES AND EXPLOIT THE SIGNIFICANT POTENTIAL FOR IMPROVED SERVICE AND
PROFITABILITY.
AFTER THE SUCCESS OF THE INITIAL COST CUTTING EXERCISE IN THE INSURANCE GROUP,
THERE REMAINS SCOPE FOR FURTHER EFFICIENCY AND PRODUCTIVITY IMPROVEMENTS.
NOTWITHSTANDING BUSINESS RISKS RELATING TO THE ADVENT OF THE MILLENNIUM, THERE
IS A REASONABLE PROSPECT FOR A FURTHER DECLINE IN INTEREST RATES AND A MORE
POSITIVE STOCK MARKET SENTIMENT. BOTH ARE KEY DRIVERS OF PROFITABILITY IN THE
FIRSTRAND GROUP. CONSEQUENTLY, WE ARE CONFIDENT OF DELIVERING ABOVE AVERAGE
REAL GROWTH IN EARNINGS PER SHARE IN THE YEAR AHEAD.
DIVIDEND DECLARATION
NOTICE IS HEREBY GIVEN THAT A FINAL DIVIDEND OF 8,00 CENTS PER SHARE (1998: 4,5
CENTS PER SHARE) WAS DECLARED ON 17 SEPTEMBER 1999 IN RESPECT OF THE YEAR ENDED
30 JUNE 1999, PAYABLE TO ORDINARY SHAREHOLDERS REGISTERED IN THE BOOKS OF THE
COMPANY AT THE CLOSE OF BUSINESS ON 15 OCTOBER 1999. DIVIDENDS WILL, WHERE
APPLICABLE, BE TRANSFERRED ELECTRONICALLY, ON 29 OCTOBER 1999 TO BANK ACCOUNTS
OF SHAREHOLDERS. DIVIDEND CHEQUES WILL, IN THE ABSENCE OF APPROPRIATE MANDATES,
BE POSTED ON THIS DATE.
THE FINAL DIVIDEND TOGETHER WITH THE INTERIM DIVIDEND OF 7,5 CENTS PER SHARE,
BRINGS THE TOTAL DIVIDEND FOR THE YEAR TO 15,5 CENTS PER SHARE (1998: 10,39
CENTS PER SHARE) WHICH REPRESENTS AN INCREASE OF 49%. THE DIVIDEND COVER IN THE
YEAR UNDER REVIEW WAS 2,9 TIMES (1998: 2,6 TIMES).
FOR AND ON BEHALF OF THE BOARD
GT FERREIRA
CHAIRMAN
LL DIPPENAAR
CHIEF EXECUTIVE OFFICER
17 SEPTEMBER 1999
TRANSFER SECRETARIES
COMPUTERSHARE SERVICES LIMITED,
4TH FLOOR, EDURA HOUSE, 41 FOX STREET, JOHANNESBURG, 2001
REGISTERED OFFICE
17TH FLOOR, 1 MERCHANT PLACE, CORNER FREDMAN DRIVE AND RIVONIA ROAD, SANDTON,
2149
SUMMARISED GROUP INCOME STATEMENT
FOR THE YEAR ENDED 30 JUNE
1999 1998
(AUDITED) (AUDITED) %
RM RM CHANGE
NET INCOME AFTER TAX ATTRIBUTABLE
TO SHAREHOLDERS
BANKING OPERATIONS 1 898 418
INSURANCE OPERATIONS 638 187
INTEREST ON RIGHTS ISSUE PROCEEDS - 83
HOLDING COMPANY EXPENSES (47) -
TAXATION* (41) -
MANAGEMENT EXPENSES (6) -
2 489 688
ORDINARY DIVIDENDS (844) (347)
RETAINED INCOME FOR THE YEAR 1 645 341
DISTRIBUTABLE RESERVE AT BEGINNING OF YEAR 281 301
1 926 642
CAPITALISATION AWARD - (343)
TRANSFER TO RESERVES (20) (18)
DISTRIBUTABLE RESERVE AT END OF YEAR 1 906 281
NUMBER OF SHARES IN ISSUE (MILLION):
AT REPORT DATE 5 445 5 445
WEIGHTED AVERAGE DURING THE PERIOD 5 445 2 510
EARNINGS PER SHARE (CENTS) 45,7 27,4 67
HEADLINE EARNINGS PER SHARE (CENTS) 45,6 27,6 65
HEADLINE EARNINGS PER SHARE (CENTS)
(1998: PRO FORMA) 45,6 34,4 32
DIVIDEND PER SHARE (CENTS):
FIRST INTERIM (DECLARED 23 FEBRUARY 1999) 7,50 3,22
SECOND INTERIM - 2,67
FINAL (DECLARED 17 SEPTEMBER 1999) 8,00 4,50
TOTAL 15,50 10,39 49
HEADLINE EARNINGS RECONCILIATION
(R MILLION):
NET TAXED EARNINGS ATTRIBUTABLE
TO SHAREHOLDERS 2 489 688
ADJUSTMENTS RELATING TO THE DISPOSAL
OF JOINT VENTURE (7) 5
HEADLINE EARNINGS ATTRIBUTABLE
TO SHAREHOLDERS 2 482 693
THE HEADLINE EARNINGS PER SHARE
IN THE PRIOR YEAR HAVE BEEN BASED
ON THE WEIGHTED AVERAGE NUMBER
OF SHARES IN ISSUE
* INCLUDES STC OF R34 MILLION.
SUMMARISED GROUP BALANCE SHEET
AT 30 JUNE
1999 1998
(AUDITED) (AUDITED)
RM RM
ASSETS
BANKING OPERATIONS 133 796 125 265
INSURANCE OPERATIONS 53 186 54 487
PROPERTY AND EQUIPMENT 3 583 3 557
CURRENT ASSETS 8 695 11 383
TOTAL ASSETS 199 260 194 692
SHAREHOLDERS' EQUITY AND LIABILITIES
DEPOSITS AND CURRENT ACCOUNTS 115 392 118 122
CREDITORS AND ACCRUALS 14 085 13 816
DEFERRED TAXATION 1 157 1 104
DEBENTURES AND LONG-TERM LIABILITIES 2 313 459
LIABILITIES TO CLIENTS UNDER ACCEPTANCES 3 062 1 068
TOTAL LIABILITIES 136 009 134 569
LIABILITIES TO POLICYHOLDERS 51 719 50 350
OUTSIDE SHAREHOLDERS' INTERESTS 518 429
CAPITAL AND RESERVES 11 014 9 344
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 199 260 194 692
THE FINANCIAL SERVICES GROUP WITH THE HEARTBEAT OF A MERCHANT BANK
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