Wrap Text
FirstRand Limited - Unaudited interim results
FirstRand Limited
Share code : FSR
ISIN : ZAE000014973
Financial Imagineering
Delivering on our promises
Unaudited interim results
For the six months ended 31 December 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
First National Bank retail banking division incorporates the branch network and
all basic and transactional banking product offerings to the consumer market.
FNB HomeLoans is the primary mortgage lending operation in the retail consumer
market.
WesBank
WesBank is a full service provider of instalment credit finance to the retail
and corporate market.
eBucks.com
e-Bucks.com is the internet banking operation incorporating full retail internet
banking functionality and the Banking Group`s customer appreciation programme.
Outsurance and First Link
OUTsurance offers direct short-term insurance products. FirstLink offers
insurance broking services to retail and medium corporate clients.
First National Bank of Namibia
First National Bank of Botswana
First National Bank of Swaziland
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
Ansbacher (South Africa) provides a holistic wealth management offering to high
net worth individuals, focused on personalised banking, advisory and portfolio
management services.
Origin
Origin, the merchant bank for individuals, is focused on the provision of
differentiated banking and investment products to the mass affluent market.
Momentum
Momentum Life develops and markets investment and risk products that create and
preserve wealth in the middle to upper-income market.
Momentum
Momentum MultiManagers is a multi-management asset management business servicing
institutional and retail clients in South Africa and internationally.
Ansbacher
Ansbacher (United Kingdom) offers personalised holistic global wealth management
to high net worth individuals in international markets.
Corporate cluster
Rand Merchant Bank
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
FNB Corporate provides a broad range of transactional, lending and basic banking
products to the mid and large corporate markets, government and parastatals.
Banking Group Treasury
The centralised treasury is responsible for the liquidity, funding and interest
rate management of the Banking Group.
First Rand Asset Management
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
Momentum Employee Benefits offers insurance benefits, consulting,
administration, risk and investment solutions to the corporate and union market.
Health cluster
Discovery
Discovery focuses on making people healthier and protecting and enhancing their
lifestyles. Discovery`s products relate to healthcare funding and life assurance
and are all underpinned by the Vitality wellness programme.
Central Cluster
MOMENTUM SHAREHOLDER ASSETS
Represents the interest, dividends and net rentals earned on Momentum Group`s
shareholders` assets.
BANKING GROUP CAPITAL CENTRE
The Capital Centre owns and manages the Banking Group`s capital base.
FirstBank
Financial Imagineering
1966/010753/06 Share code: FSR ISIN code: ZAE 000014973 ("FSR")
Introduction
This report covers the consolidated financial results of FirstRand Limited
(FirstRand) and its wholly-owned subsidiaries, FirstRand Bank Holdings Limited
(the Banking Group) and Momentum Group Limited (the Insurance Group).
Comprehensive reports relating to these subsidiaries are included in this
circular and should be read in conjunction with this report.
Salient features
Pre AC133 Post
AC133
Core operational headline earnings +23,6% +26,7%
Headline earnings -23,8% -19,3%
Dividend per share +22,2% +22,2%
Total assets under management
and administration R480bn R482bn
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
Unaudited six months ended
31 December
Pro forma1 Pro forma1
R million 2002 2001 % change
Banking Group 1 498 2 134 (29,8)
Core operations 1 860 1 420 31,0
Foreign currency (362) 714 >(100)
translation
(losses)/gains
Insurance Group 523 501 4,4
FirstRand Limited (18) (7) >(100)
Headline earnings 2 003 2 628 (23,8)
Add/(less): Foreign
currency translation
(losses)/gains 362 (714) >(100)
Core operational 2 365 1 914 23,6
headline earnings
Dividends declared (Rm) 898 735 22,2
Return on average equity
(based on core
operational
headline earnings) (%) 26,0 25,3
Return on average equity
(based on headline 20,5 32,0
earnings) (%)
Number of shares in 5 445 5 445
issue (million)
Core operational
headline
earnings per share 43,4 35,1 23,6
(cents)
Headline earnings per 36,8 48,3 (23,8)
share (cents)
Earnings per share 33,4 47,9 (30,2)
(cents)
Dividend per share
(cents)
Interim 16,5 13,5 22,2
Final n/a n/a -
Total 16,5 13,50 22,2
Audited
Unaudited six months ended Year
31 December ended
Actual2 Actual 30 June
2002 2001 % change 2002
1 731 2 260 (23,4) 4 040
2 093 1 546 35,4 3 492
(362) 714 >(100) 548
510 501 1,8 1 038
(18) (7) >(100) (61)
2 223 2 754 (19,3) 5 017
362 (714) >(100) (548)
2 585 2 040 26,7 4 469
898 735 22,2 1 552
27,4 25,1 25,4
22,0 31,3 26,9
5 445 5 445 5 445
47,5 37,5 26,7 82,1
40,8 50,6 (19,3) 92,1
37,4 50,2 (25,4) 88,2
16,5 13,5 22 13,5
n/a n/a - 15,0
16,5 13,50 22 28,5
Notes
1. The pro forma columns exclude the effect of AC133.
2. The actual column for 2002 includes the effect of AC133.
Headline earnings reconciliation
for the six months ended 31 December 2002
Unaudited six months ended
31 December
Pro forma1 Pro forma1
R million 2002 2001 % change
Attributable earnings
Banking Group 1 494 2 131 (29,9)
Insurance Group 340 480 (29,2)
Goodwill amortised - 3 3 -
intergroup
1 837 2 614 (29,7)
FirstRand Limited (18) (7) >(100)
Earnings attributable to
ordinary shareholders 1 819 2 607 (30,2)
Add: Goodwill amortised 18 19
Add: Goodwill impaired 166 -
Add: Loss on disposal of - 2
assets
Less: Profit on sale of - -
subsidiary
Less: Abnormal profit on
release
of reserves - -
Headline earnings 2 003 2 628 (23,8)
Audited
Unaudited six months ended Year
31 December ended
Actual2 Actual 30 June
2002 2001 % change 2002
1 727 2 257 (23,5) 4 036
327 480 (31,9) 825
3 3 - 5
2 057 2 740 (24,9) 4 866
(18) (7) >(100) (61)
2 039 2 733 (25,4) 4 805
18 19 58
166 - 210
- 2 4
- - (32)
- - (28)
2 223 2 754 (19,3) 5 017
Balance sheet
Unaudited at 31 December
Pro forma1 Pro forma1
R million 2002 2001
ASSETS
Banking operations 248 163 216 190
Cash and short-term funds 21 366 14 371
Investment securities and other 43 466 52 761
investments
Financial instruments held for - -
trading
Investment securities - -
Held-to-maturity - -
Available for sale - -
Advances 181 187 149 058
Originated - -
Held to maturity - -
Available for sale - -
Trading - -
Non-recourse investments 2 144 -
Insurance operations 77 094 79 158
Funds on deposit 13 988 8 031
Government and public authority 11 650 9 095
stocks
Debentures and other loans 12 765 8 384
Policy loans 578 549
Equity investments 35 187 50 106
Property investments 2 926 2 993
Current assets 13 947 9 123
Loans 1 214 1 108
Investments in associated 2 251 1 150
companies
Derivative instruments 37 925 53 235
Deferred taxation asset 1 070 265
Intangible assets 672 1 350
Property and equipment 3 998 3 992
Total assets 386 334 365 571
LIABILITIES AND SHAREHOLDERS`
EQUITY
Deposits and current accounts 202 984 170 658
Non-recourse deposits 2 144 -
Current liabilities 23 191 19 665
Taxation 568 284
Derivative instruments 35 928 59 398
Short trading positions 17 688 13 078
Deferred taxation liability 2 045 1 657
Post-retirement medical liability 1 260 1 195
Long-term liabilities 4 487 3 911
Policyholder liabilities 73 627 75 960
Policyholder liabilities under 73 627 75 960
insurance contracts
Policyholder liabilities under - -
investment contracts
Total liabilities 363 922 345 806
Outside shareholders` interests 1 283 1 289
Shareholders` funds
Share capital and share premium 9 700 9 595
Reserves 11 429 8 881
Total liabilities and 386 334 365 571
shareholders` equity
Audited
Unaudited at 31 December at
Actual2 Actual 30 June
2002 2001 2002
249 664 217 800 248 403
21 491 14 371 24 784
43 471 52 761 44 654
25 715 - -
17 756 - -
5 469 - -
12 287 - -
182 558 150 668 177 227
147 048 - -
9 859 - -
7 111 - -
18 540 - -
2 144 - 1 738
77 043 79 158 76 461
13 988 8 031 13 334
11 650 9 095 9 868
12 714 8 384 9 675
578 549 580
35 187 50 106 40 100
2 926 2 993 2 904
13 940 9 123 10 523
1 214 1 108 1 150
2 251 1 150 1 736
38 333 53 235 32 342
938 265 1 264
672 1 350 942
3 998 3 992 4 045
388 053 367 181 376 866
202 903 170 658 201 404
2 144 - 1 738
23 384 19 665 14 716
568 284 508
36 910 59 398 37 215
17 688 13 078 16 799
2 045 2 041 2 794
1 260 1 195 1 211
4 487 3 911 4 229
73 469 75 960 73 273
38 095 75 960 73 273
35 374 - -
364 858 346 190 353 887
1 272 1 289 1 112
9 700 9 595 9 585
12 223 10 107 12 282
388 053 367 181 376 866
Notes
1. The pro forma columns exclude the effect of AC133.
2. The actual column for 2002 includes the effect of AC133.
Summarised cash flow statement
for the six months ended 31 December 2002
Audited
Year
Unaudited at 30 ended
December
2002 2001 30 June
R million (Unaudited) (Unaudited) 2002
Cash flows from
operating activities
Cash generated by 8 262 8 235 15 401
operations
Working capital (1 886) 4 364 (3 218)
changes
Cash inflow from 6 376 12 599 12 183
operations
Taxation paid (906) (974) (1 412)
Dividends paid (817) (681) (1 416)
Net cash inflow from 4 653 10 944 9 355
operating activities
Net cash (7 717) (4 742) 4 057
(outflow)/inflow from
investment activities
Net cash inflow from 425 243 481
financing activities
Net (decrease)/increase (2 639) 6 445 13 893
in cash and cash
equivalents
Cash and cash 38 118 15 957 16 294
equivalents at beginning
of period
Cash and cash - - 7 931
equivalents acquired
Cash and cash 35 479 22 402 38 118
equivalents at end of
period
Statement of changes in equity
for the six months ended 31 December 2002
Share Share Retained
R million capital premium earnings
Balance as at 1 July 2002
As previously stated 56 9 529 9 590
Adoption of AC133 - - (328)
Release of general risk - - 1 181
provision
Transfer to general risk reserve - - (1 181)
Restated balance as at 1 July 56 9 529 9 262
2002
Issue of preference shares - 115 -
Currency translation differences - - -
Revaluation of investment assets - - -
AC133 adjustments - - -
Movement in other reserves - - -
Transfer to general risk - - (123)
reserves
Transfer to non-distributable - - (2)
reserves
Earnings attributable to - - 2 039
shareholders
Dividends paid - - (817)
Balance as at 31 December 2002 56 9 644 10 359
Balance as at 31 December 2001
As previously stated 56 9 539 8 919
Restatement of investment - - -
reserve
AC116 adjustment - - (1 388)
Release of general risk - - 1 226
provision
Transfer to general risk reserve - - (1 226)
Restated balance as at
31 December 2001 56 9 539 7 531
Non- General Total
distributable AC133 risk shareholders`
reserves reserve reserve funds
1 132 - - 20 307
- (425) - (753)
- - - 1 181
- - 1 181 -
1 132 (425) 1 181 20 735
- - - 115
(425) - - (425)
(6) - - (6)
- 280 - 280
2 - - 2
- - 123 -
2 - - -
- - - 2 039
- - - (817)
705 (145) 1 304 21 923
1 645 - - 20 159
(295) - - (295)
- - - (1 388)
- - - 1 226
- - 1 226 -
1 350 - 1 226 19 702
Assets under management and administration
as at
Unaudited 31 December
Pro forma Pro forma
R million 2002 2001
Holding Company 1 222 1 112
Banking Group 294 691 274 125
Insurance Group 184 282 208 954
On-balance sheet 90 421 90 334
Off-balance sheet assets managed
and administered
on behalf of clients 93 861 118 620
Total 480 195 484 191
Unaudited 31 December Audited
Actual Actual 30 June
2002 2001 2002
1 222 1 112 1 158
296 461 275 735 283 840
184 231 208 954 190 196
90 370 90 334 91 868
93 861 118 620 98 328
481 914 485 801 475 194
Sources of profit
for the six months ended 31 December
R million 2002 % 2001 %
Retail Cluster 1 197 50,6 928 48,4
Retail banking 753 31,8 536 27,9
Instalment finance 238 10,1 230 12,0
African subsidiaries 165 7,0 143 7,5
Short-term insurance 41 1,7 19 1,0
Corporate Cluster 593 25,1 602 31,5
Investment banking 272 11,5 216 11,3
Corporate banking 174 7,4 193 10,1
Asset management 86 3,6 134 7,0
Employee benefits 61 2,6 59 3,1
Wealth Cluster 156 6,6 210 11,0
Individual insurance 198 8,3 161 8,4
business
Private banking - domestic 14 0,6 3 0,2
First National Trust 9 0,4 11 0,6
Ansbacher (UK) (65) (2,7) 35 1,8
Health Cluster
Discovery Holdings 57 2,4 55 2,9
Capital 362 15,3 119 6,2
Capital centre - Banking 259 11,0 29 1,5
Group
Investment income on 121 5,1 97 5,1
shareholders` portfolio
FirstRand Limited (18) (0,8) (7) (0,4)
Core operational headline 2 365 100,0 1 914 100,0
earnings (pre-AC133)
Notes
1. Core operational headline earnings exclude foreign currency translation
losses and gains.
2. Taxation relating to the Banking Group has been allocated across the bank`s
operating divisions on a pro rata basis.
Commentary
Presentation
FirstRand is the first major financial services group in South Africa to present
its financial results in accordance with the requirements of AC133 "Financial
Instruments: Recognition and Measurement". This standard introduces the concept
of fair value accounting and is a prospective standard.
The application of AC133 is expected to result in a considerable amount of
debate following the release of this set of results.
In the Insurance Group, the implementation of AC133 has necessitated the
classification of policyholder contracts between insurance contracts and
investment contracts. Insurance contracts continue to be valued and disclosed in
terms of the Financial Soundness Valuation (FSV) basis. Investment contracts are
accounted for at fair value. The net effect of the implementation of AC133 on
earnings is not material. In the Banking Group, the implementation of AC133 has
a material impact on headline earnings and net asset value per share.
Accordingly, these financial results are shown both before and after the
implementation of AC133 to facilitate a meaningful interpretation of the results
for the six months to 31 December 2002.
A detailed analysis of the changes arising from AC133 is set out in the
commentaries of the Banking and Insurance Groups, and in the statement of
changes in equity.
The change in accounting practice resulting from AC133 is likely to lead to
increased volatility in reported earnings in the future and will place a greater
emphasis over the longer term on growth in net asset values.
Operating Environment
The operating environment has been one of continuing high interest rates, a
strengthening of the rand relative to other major currencies and very poor
investment markets both locally and internationally. The changes in the tax
environment have been a challenge, while internationally the threat of war in
the Middle East continues to be of global concern.
Earnings and Dividends
Headline earnings for the period to 31 December 2002 of R2 223 million (47,5
cents per share) prepared in accordance with AC133, represents a decrease of 19%
on the corresponding period for the prior year.
To ensure a meaningful comparison the following commentary is in respect of the
financial results before adjustments caused by the implementation of AC133. The
dividend proposals and cover are based on core operational headline earnings
excluding the impact on any translation gains or losses.
Total headline earnings of R2 003 million (36,8 cents per share) which include
an exceptional translation loss represent a decrease of 24% over the prior
period. The translation loss is the result of a significant strengthening of the
rand during the period under review. This decrease in headline earnings should
be compared with an increase of 59,0% in headline earnings in the six months to
December 2001 when there was a significant decline in the value of the rand.
Since 31 December 2002, there has been a further strengthening of the rand
relative to other major currencies.
Core operational headline earnings, excluding the exceptional translation loss
of R362 million (2001: R714 million gain), increased by a pleasing 24% to R2 365
million (43,4 cents per share) compared to R1 914 million (35,2 cents per share)
in the corresponding period of the previous year.
An interim dividend of R898,5 million (16,5 cents per share) has been declared
representing an increase of 22,0% on the interim dividend of the previous year.
Dividend cover, based on core operational earnings has been retained at 2,6
times. The dividend is sourced 24,0% from the Insurance Group (2001: 45,0%) and
76,0% (2001: 55,0%) from the Banking Group.
The calculation of return on equity is affected by the translation losses and
gains. Excluding these the annualised return on average equity was 25,9% (2001:
25,3%). If the translation gains and losses are included the return is 20,5%
(2001: 32,0%). For the purposes of calculating the return on equity, preference
shares relating to the Outperformance scheme are ignored as there was no
dilutory effect at 31 December 2002.
Total assets under management declined marginally to R480 billion, reflecting
the impact of the translation losses referred to above and the state of local
and international stock markets.
Review of Operations
A review of the results of the Group`s operating divisions is dealt with in
detail in each of the reports of the Insurance and Banking Groups. This
excellent set of results reflects the benefits of a diverse and resilient
earnings base and the benefits of sustained focus in our core businesses.
In summary the Retail Banking Cluster reflected growth of 26,0% over the
corresponding period. This impressive increase is due to scale benefits achieved
as a result of excellent organic growth as well as growth resulting from the
acquisition of the Saambou and NBS books. The endowment effect on the larger
retail deposit book coupled with the higher interest rate environment also
impacted favourably on results. The African Subsidiaries have continued to
perform well. OUTsurance doubled earnings as a result of organic growth and
acquisitions made.
Results of the Corporate Cluster were negatively impacted by lower earnings in
Asset Management and an increase in the bad debts provisions of FNB Corporate.
These negatives were offset by good growth in the after-tax profits in the
Investment Banking Division.
In the Wealth Cluster, Momentum Life produced excellent results while enjoying
good gains in respect of recurring premium new business. There was also very
pleasing progress made in Private Banking. Ansbacher`s international operations
were negatively affected by once-off losses in Treasury activities and reduced
business volumes from the Caribbean region.
Earnings from the Health Cluster were marginally positive after taking account
of the write-off of costs incurred in developing Discovery`s American
operations. Discovery`s domestic operations showed an excellent increase in
headline earnings of 30% following strong new business growth and a further
improvement in operating efficiencies.
The Capital Centre has shown good gains which result largely from the endowment
effect of the higher interest rate environment, the growth in capital and
satisfactory returns from the shareholder portfolio within the Insurance Group.
The period to December 2001 included provisions on the converted debt to equity
of McCarthy and Relyant. Similar provisions were not required during the period
under review.
Group Capital
The Group`s capital adequacy ratios are satisfactory and are capable of meeting
the anticipated volatility in earnings resulting from AC133 and the proposed
changes to the method in which capital adequacy reserves are calculated in life
companies. The capital demands of the Health Cluster, which are driven by new
business in Discovery Life and the start-up costs of Destiny Health, are
currently being evaluated.
Accounting Policies
The accounting policies of the Group comply in all material respects with
Statements of South African GAAP and the Companies Act of 1973. These accounting
policies are consistent with those applied during the year to 30 June 2002 with
the exception of the introduction of AC133.
Contingent Liabilities
The Group is party to legal proceedings in the normal course of business.
Appropriate provisions are made when losses are expected to materialise.
Prospects
The Group will continue to benefit from its diverse earnings base, a strong
external focus and the sound foundations established over the last three years.
It is also well positioned to benefit from any upturn in the stock markets.
We are confident that the pleasing growth trend established in the first half of
the year will be maintained provided there are no major shocks or instability
caused by the threat of war in the Middle East.
For and on behalf of the Board
GT Ferreira LL Dippenaar
Chairman Chief Executive
Sandton
28 February 2003
Interim Dividend Declaration
Notice is hereby given that an interim dividend of 16,5 cents per ordinary share
has been declared on 28 February 2003 in respect of the half year ended 31
December 2002. The last day to trade in these shares on a cum dividend basis
will be 20 March 2003 and the first day to trade ex dividend will be 24 March
2003. The record date will be 28 March 2003 and the payment date is 31 March
2003.
Please note that no dematerialisation or rematerialisation can be done in the
period 24 March 2003 to 28 March 2003, both days inclusive.
By order of the Board
AH Arnott
Company Secretary
28 February 2003
Directors
GT Ferreira (Chairman), LL Dippenaar (CEO), BH Adams, VW Bartlett, DJA Craig
(British), DM Falck, PM Goss, PK Harris, MW King, SR Maharaj, MC Ramaphosa, KC
Shubane, BJ van der Ross, Dr F van Zyl Slabbert, RA Williams
Secretary and registered office
AH Arnott BCom, CA(SA)
17th floor, 1 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
(in terms of JSE requirements)
RMB Corporate Finance
1 Merchant Place, corner of Fredman Drive and Rivonia Road, Sandton, 2196
Transfer secretaries
Computershare Investment Services Limited
12th Floor, 70 Marshall Street, Johannesburg
Postal address
PO Box 786273, Sandton, 2146
Telephone: +27 11 282 1808
Telefax: +27 11 282 8088
Web address: www.firstrand.co.za
Sponsor
(in terms of JSE requirements)
RMB Corporate Finance
1 Merchant Place, corner of Fredman Drive and Rivonia Road, Sandton, 2196
Transfer secretaries
Computershare Investment Services Limited
12th Floor, 70 Marshall Street, Johannesburg
FirstRand
Banking Group
Introduction
The FirstRand Banking Group (the Banking Group) is 100% held by FirstRand
Limited. The consolidated figures in this report include the divisional
operations of FirstRand Bank Limited, namely First National Bank, FNB HomeLoans,
WesBank, Ansbacher (SA), Origin, Rand Merchant Bank (RMB), FNB Corporate as well
as the entities FirstLink, OUTsurance, Ansbacher (UK), FNB Swaziland, FNB
Namibia, FNB Botswana and FirstRand International.
Salient features
Pre AC133 Post AC133
Core headline +31,0% +35,4%
earnings
Attributable -29,9% -23,5%
earnings
Headline -29,8% -23,4%
earnings
Cost to 54,4% 52,9%
income ratio
Advances +21,6% +22,5%
growth
This circular is available on our website at: www.firstrand.co.za
E-mail questions to: asktheCFO@firstrand.co.za
Income statement
Unaudited
six months ended
31 December
Pro forma1 Pro forma1
R million 2002 2001 % change
Interest income 13 304 8 609 54,5
Interest expenditure (9 076) (5 277) 72,0
Net interest income
before impairment
of advances 4 228 3 332 26,9
Impairment of (701) (680) 3,1
advances
Net interest income
after impairment
of advances 3 527 2 652 33,0
Non-interest income 2 767 3 658 (24,4)
Non-interest income
excluding
translation 3 129 2 944 6,3
(losses)/gains
Translations (362) 714 >(100,0)
(losses)/gains
Net income from 6 294 6 310 (0,3)
operations
Operating (4 082) (3 750) 8,9
expenditure
Income from 2 212 2 560 (13,6)
operations
Share of earnings of 148 132 12,1
associate companies
Income before 2 360 2 692 (12,3)
indirect taxation
Indirect taxation (175) (112) 56,3
Income before direct 2 185 2 580 (15,3)
taxation
Direct taxation (591) (366) 61,5
Income after 1 594 2 214 (28,0)
taxation
Earnings (100) (83) 20,5
attributable to
outside shareholders
Earnings
attributable to
ordinary
shareholders 1 494 2 131 (29,9)
Less: Profit on sale - - -
of subsidiaries
Plus: Goodwill 4 3 33,3
Headline earnings 1 498 2 134 (29,8)
Translation losses/ 362 (714) >(100,0)
(gains) reversed
Core operational 1 860 1 420 31,0
headline earnings
Unaudited Audited
six months ended Year ended
31 December
30 June
Actual 2 Actual
2002 2001 % change 2002
13 436 8 609 56,1 18 721
(9 109) (5 277) 72,6 (12 304)
4 327 3 332 29,9 6 417
(568) (500) 13,6 (1 283)
3 759 2 832 32,7 5 134
2 886 3 658 (21,1) 8 319
3 248 2 944 10,3 7 771
(362) 714 >(100,0) 548
6 645 6 490 2,4 13 453
(4 089) (3 750) 9,0 (8 378)
2 556 2 740 (6,7) 5 075
148 132 12,1 368
2 704 2 872 (5,8) 5 443
(175) (112) 56,3 (281)
2 529 2 760 (8,4) 5 162
(702) (420) 67,1 (945)
1 827 2 340 (21,9) 4 217
(100) (83) 20,5 (182)
1 727 2 257 (23,5) 4 035
- - - (4)
4 3 33,3 9
1 731 2 260 (23,4) 4 040
362 (714) >(100,0) (548)
2 093 1 546 35,4 3 492
Notes
1. The pro forma columns exclude the effect of AC133.
2. The actual column for 2002 includes the effect of AC133.
Balance sheet
Audited
Unaudited at 31 Unaudited at 31 at
December December
Pro forma1 Pro Actual2 Actual 30 June
forma1
R million 2002 2001 2002 2001 2002
Assets
Cash and short- 21 366 14 371 21 491 14 371 24 643
term funds
Derivative 33 142 48 810 33 549 48 810 26 139
financial
instruments
qualifying for 682
hedging
trading 32 867
Advances 181 172 149 044 182 543 150 177 211
654
originated 147 033
held-to- 9 859
maturity
available for 7 111
resale
trading 18 540
Investment 43 475 52 771 43 481 52 771 44 664
securities and
other investments
Financial 25 725
instruments held
for trading
Investment 17 756
securities
held-to- 5 469
maturity
available for 12 287
sale
Non-recourse 2 144 - 2 144 - 1 738
investments
Debtors 7 078 4 754 7 070 4 754 3 271
Investment in 1 680 643 1 680 643 1 169
associated
companies
Property and 3 362 3 370 3 362 3 370 3 412
equipment
Deferred taxation 1 066 258 933 258 1 253
asset
Intangible assets 294 196 294 196 288
Total assets 294 779 274 217 296 547 275 283 788
827
LIABILITIES AND
SHAREHOLDERS`
FUNDS
Liabilities
Deposit and 202 984 170 658 202 903 170 201 404
current accounts 658
Non-recourse 2 144 - 2 144 - 1 738
liabilities
Short trading 17 688 13 078 17 688 13 078 16 799
positions
Derivative 31 621 54 229 32 446 54 229 31 525
financial
instruments
- qualifying for 950
hedging
- trading 31 496
Post retirement 966 860 966 860 898
medical liability
Creditors and 16 531 15 573 16 722 15 573 7 014
accruals
Provisions 814 529 814 529 831
Taxation 399 4 399 4 429
Deferred taxation 1 779 1 657 1 779 2 041 2 438
liability
Long-term 3 471 3 201 3 471 3 201 3 217
liabilities
Total liabilities 278 397 259 789 279 332 260 266 293
173
Outside 443 695 443 695 475
shareholders`
interest
Shareholders`
funds
Ordinary share 106 106 106 106 106
capital
Share premium 1 332 1 332 1 332 1 332 1 332
Non-distributable 1 280 2 001 2 303 3 227 3 239
reserves
Distributable 13 221 10 294 13 031 10 294 12 343
reserves
Total equity 15 939 13 733 16 772 14 959 17 020
Total liabilities 294 779 274 217 296 547 275 283 788
and shareholders` 827
funds
Contingencies and 26 484 24 417 26 484 24 417 27 284
commitments
Notes
1. The pro forma
columns exclude
the effect of
AC133.
2. The actual
column for 2002
includes the
effect of AC133.
Review of the group results
The Banking Group has produced excellent results, benefiting from strong organic
growth as well as good contributions from the scale benefits achieved from the
acquisitions made in the previous year. Core operational headline earnings,
which exclude translation gains/(losses) and the impact of AC133, increased by
31,0% from R1 420 million to R1 860 million. On a post-AC133 basis, earnings
attributable to shareholders decreased by 23,5% to R1 727 million (2001: R2 257
million) as a result of the translation loss, which is a reversal of last year`s
exceptional gain. Core headline earnings are calculated as follows:
Year
Six months ended ended
31 December % 30 June
R million 2002 2001 change 2002
Earnings
attributable
to shareholders 1 727 2 257 (23,5) 4 035
Translation
losses/(gains) 362 (714) >(100,0) (548)
Operational
earnings
attributable to
shareholders 2 089 1 543 35,4 3 487
Less: Impact of (233) (126) 84,9
AC133
Profit/loss on sale
of subsidiary - - - (4)
Add: Goodwill 4 3 33,3 9
Core operational
headline earnings 1 860 1 420 31,0 3 492
Exceptional translation (losses)/gains
The Banking Group recognises translation losses and gains 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 losses and
gains relating to independent operations are transferred directly to reserves.
The significant strengthening of the Rand relative to the comparative period has
given rise to large translation losses in the current financial period which is
a reversal of the large gains in the previous financial period.
Translation (losses)/gains
Year
Six months ended ended
Cumu- 31 December 30 June
R million lative(1) 2002 2001 % change 2002
Non-
distributable
reserve 174 (404) 944 >(100,0) 578
Income statement 186 (362) 714 >(100,0) 548
Total
translation
(losses)/gains 360 (766) 1 658 >(100,0) 1 126
(1) For the period from 1 July 2001.
Impact of AC133
These interim results have been prepared in accordance with the requirements of
AC133, "Financial instruments: Recognition and measurement". This is a new
accounting standard applicable for periods commencing on or after 1 July 2002.
AC133 is a prospective standard, meaning it is not applied retrospectively. As a
result, meaningful comparison requires the reversal of the impact of AC133.
Further details regarding the differences between pre-AC133 and post-AC133 are
set out in more detail on page 20.
Accounting policies
The financial results of the Banking Group 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 for the introduction of AC133.
The Banking Group is the first major South African Bank to comply with AC133.
The application of this statement is expected to result in a considerable amount
of debate following the release of this set of results. To the extent that this
debate leads to changes after the initial implementation thereof, it may be
necessary for the Banking Group to make changes to aspects of its own
interpretation prior to the release of its full year results in September 2003.
For comparative purposes, the Income Statement and Balance Sheet at 31 December
2002 are presented in both a pre- and post- AC133 format. To be meaningful, all
commentary below relates to the comparisons between the pre-AC133, pro forma
numbers. A detailed section at the end of this report deals with the difference
between the pre- and post-AC133 numbers.
Group operational results
Interest earned
The prime interest rate increased by 1% during the period, following a 3%
increase over the course of the six months ended 30 June 2002. Consequently,
interest rates were on average 3,5% higher than the comparative period. This,
together with the increase in average advances, accounts for the increase in
absolute interest received and paid. Net interest income, which increased by
26,9%, was positively influenced by:
- the volume impact arising from the considerable organic growth in both assets
and liabilities;
- the volume and margin impact on net interest income arising from the NBS and
Saambou transactions; and
- a further increase in the Banking Group`s average capital base following
retention of earnings in the previous financial year.
These positive factors outweighed the negatives, which included:
- a tightening in corporate margins;
- holding costs of non-performing corporate exposures;
- reduced interest rates on the foreign capital base of the Banking Group; and
- reduced mismatch profits.
Interest margins
The gross interest margin based on average assets declined from 4,99% to 4,75%.
Margins were affected by the following factors:
- the deposit base, especially in retail, benefited from a widening of margins
in a higher interest rate environment;
- asset operations benefited from a change in average mix following the
acquisition of the home loan advances in the latter part of the previous
financial year;
- the proportionate increase in the use of wholesale funding for the banking
book, following the increases in advances brought about by these acquisitions,
negatively impacted overall margins; and
- 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 21,5% relative to the comparative period, and by 3,4% in
the six months since 30 June 2002.
At At
31 December % 30 June
R million 2002 2001 change 2002
SA banking 157 046 120 925 29,9 150 248
operations
International
banking 10 777 11 397 (5,4) 11 733
operations
US Corporate 8 188 11 452 (28,5) 9 599
debt
African
banking
operations 7 069 5 938 19,0 6 275
SA non-banking
operations 2 605 3 073 (15,2) 1 655
Gross advances 185 685 152 785 21,5 179 510
Less: (4 513) (3 741) 20,6 (4 365)
Provisions
Net advances 181 172 149 044 21,6 175 145
The strong growth in SA banking operations has arisen partially through
acquisitions (11,1%) and partially through organic growth (18,8%). The Banking
Group continued to grow its international banking operations portfolio in US
dollar terms. The steady strengthening of the Rand against the US dollar has
disguised this increase as the Rand value of these exposures steadily decreases.
The African subsidiaries have recorded a strong increase in advances on the back
of buoyant local economies and some improvement in market share. The table below
provides a detailed analysis of the gross advances growth of 21,5% referred to
above.
At At
31 December % 30 June
R million 2002 2001 change 2002
Overdrafts and
managed accounts 38 711 34 457 12,3 34 397
Card loans 3 996 3 424 16,7 3 942
Instalment 23 258 20 542 13,2 21 592
finance
Lease payments
receivable 9 345 9 244 1,1 9 514
Home loans 50 697 27 719 82,9 48 568
US Corporate 8 188 11 452 (28,5) 9 599
debt
Other advances 51 490 45 947 12,1 51 898
185 685 152 785 21,5 179 510
The acquisition of the NBS and Saambou home loan books has enabled FNB HomeLoans
to leverage its existing infrastructure and considerably increase its
contribution to group profitability. As anticipated at the time of these
acquisitions, the run off of the two books has been faster than that of the
existing FNB HomeLoans book.
WesBank has maintained its performance, with record new production and a
broadened client base contributing to an increase in market share. Increased
demand for specialised products has increased advances in RMB.
Bad debt charge
Non-performing loans
As a result of the Banking Group`s new credit methodology, the credit quality of
the Banking Group`s core advances book has continued to improve relative to
advances, despite the interest rate increases over the last twelve months.
FNB Corporate`s exposure to Relyant and Profurn are still included in non-
performing loans. The exposure to Profurn will be reduced by R500 million in the
second half of the financial year, following the sale to a foreign investor.
WesBank, FNB HomeLoans and the Retail Bank have continued to show improvements
in the credit quality of their respective advance books. The Banking Group is
confident that as long as interest rates do not rise any further, the bad debt
experience is unlikely to deteriorate. The Banking Group`s exposure to US
Corporate markets has continued to drag down overall credit quality, although
not to the extent of the prior year.
At At
31 December % 30 June
R million 2002 2001 change 2002
Non-performing loans 5 027 4 540 10,7 5 305
Less: Recoverable
amount (722) (491) 47,0 (1 014)
Net credit exposure 4 305 4 049 6,3 4 291
Less: Security (1 080) (1 114) (3,1) (1 266)
Less: Interest (813) (804) 1,1 (725)
suspended
Residual risk 2 412 2 131 13,2 2 300
Specific provision 2 412 2 131 13,2 2 300
General provision 2 101 1 610 30,5 2 065
Total provisions 4 513 3 741 20,6 4 365
Total advances 186 498 153 589 21,4 180 235
Less: Interest
suspended (813) (804) 1,1 (725)
Gross advances 185 685 152 785 21,5 179 510
Less: Provisions (4 513) (3 741) 20,6 (4 365)
Net advances 181 172 149 044 21,6 175 145
As a percentage of advances, non-performing loans continue to decline, falling
to 2,7% from 3,0% at June 2002, which is in line with the improvement in credit
quality.
Provisioning levels
At At
31 December 30 June
R million200 2002 2001 2002
Non-performing loans as a
percentage of gross advances 2,7 3,0 3,0
Specific provision as a
percentage of non-performing
loans 48,0 46,9 43,4
Specific provision as a
percentage of gross advances 1,3 1,4 1,3
General provision as a
percentage of gross advances 1,1 1,1 1,2
Total provisions as a
percentage of gross advances 2,4 2,5 2,5
Total provisions as a
percentage of residual risk 187,1 175,6 189,8
The total provision reflected in the balance sheet represents a conservative
2,4% of gross advances (June 2002: 2,5%). This decline mirrors the decrease in
non-performing loans as a percentage of gross advances.
Income statement charge
The income statement charge for bad and doubtful debts reflects an increase of
3,1% relative to the prior period. Should the abnormal charge of R150 million in
the prior period on the US Corporate debt portfolio be excluded, this charge
reflects an increase of 32,3%. The Banking Group has been negatively impacted by
additional provisions raised against the local corporate portfolio in the
current period.
Non-interest income
Year
Six months ended ended
31 December % 30 June
R million 2002 2001 change 2002
Transactional income 2 527 2 286 10,5 5 132
Trading income 452 576 (21,5) 1 772
Investment income1 178 387 (54,0) 862
Other income 120 (173) >100,0 373
Total non-interest
income1 3 277 3 076 6,5 8 139
Translation
(losses)/gains (362) 714 >(100,0) 548
Less: Income from
associates (148) (132) 12,1 (368)
Non-interest income 2 767 3 658 (24,4) 8 319
1 Includes income from associated companies.
Transactional income
Retail banking fee and commission income has grown by 14,9% as a result of
steady growth in client numbers and transaction volumes. Corporate fee income
has increased by 20,6% through a broadening of product offerings and substantial
volume increases from existing clients. Investment bank fee income, which
reflected a decline of 45%, and international fee income which reflected a
decline of 16%, remains under pressure, with the pressure on international fee
income further exacerbated by the strengthening of the Rand against the US
dollar.
Trading income
The first half of the financial year has traditionally offered fewer trading
opportunities than the second half. This trend re-occurred in the current year
and has been exaggerated by trading losses in Ansbacher (UK)`s treasury
activities. Exchange earnings continue to be solid, however volumes on client-
based activities have returned to normal levels given the stronger performance
of the Rand.
Year
Six months ended
ended
31 December % 30 June
R million 2002 2001 change 2002
Exchange earnings 302 267 13,1 591
Exchange 61 52 17,3 433
commissions
Other trading 89 257 (65,4) 748
income
Trading income 452 576 (21,5) 1 772
Investment income
Year
Six months ended ended
31 December % 30 June
R million 2002 2001 change 2002
Profit and loss on
realisation of
investment
banking assets 8 78 (89,7) (14)
Income from associated
companies 148 132 12,1 368
Dividends received 70 135 (48,1) 463
Investment income on
assets held against
employee liabilities (57) 35 >(100,0) 71
Profit on sale of plant
and equipment 9 7 28,6 (26)
Investment income 178 387 (54,0) 862
Investment income includes gains and losses from the Banking Group`s Private
Equity businesses, in addition to traditional investment activities. It is
anticipated that private equity profits will increasingly be recognised through
the `Income from associates` line.
Non-interest expenditure
Year
Six months ended ended
31 December % 30 June
R million 2002 2001 change 2002
Staff expenditure 2 326 2 031 14,5 4 412
Depreciation 232 210 10,5 436
Goodwill 4 4 - 9
Other expenditure 1 520 1 505 1,0 3 521
Total non-interest
expenditure 4 082 3 750 8,9 8 378
Non-interest expenditure increased by 8,9%. Operational expenditure increased by
8,3% from R3 750 million to R4 062 million as set out in the table below, which
is a satisfactory achievement.
Six months ended
31 December %
R million 2002 2001 change
Operational
expenditure 4 062 3 750 8,3
Saambou and
NBS acquisitions 68 - -
Currency conversion (48) - -
Total non-interest
expenditure 4 082 3 750 8,9
Efficiency ratio
The efficiency ratio has continued to improve during the period under review.
Continued strict management of costs together with the strategy of focussing on
increased revenue by utilising existing capacity, has resulted in an improvement
in the ratio from 58,5% in December 2001 to 54,4% (excluding translation
(losses)/gains) in December 2002.
Cluster performance
The divisional performances of the Banking Group, before tax, can be analysed as
follows:
Year
Six months ended ended
31 December % 30 June
R million 2002 2001 change 2002
Retail Cluster 1 746 1 248 39,9 2 492
Retail Bank 783 588 33,2 1 111
Mortgage finance 249 100 >100,0 179
eBucks 19 (21) >100,0 (31)
Instalment finance 332 303 9,6 676
African 306 252 21,4 511
subsidiaries
Insurance 57 26 >100,0 46
Corporate Cluster 656 538 21,9 1 480
Investment Banking 413 284 45,4 910
Corporate Banking 243 254 (4,3) 570
Wealth Cluster (60) 64 >(100,0) 55
Private banking
- domestic 19 6 >100,0 21
First Trust 12 12 - 23
Private banking
- offshore (91) 46 >(100,0) 11
Capital Centre 380 128 >100,0 446
2 722 1 978 37,6 4 473
Translation
(losses)/gains (362) 714 >(100,0) 548
Income before tax 2 360 2 692 (12,3) 5 021
Retail Cluster
Retail Bank
Retail Bank benefited from the Saambou deposit book acquired in May 2002, but
also saw strong organic growth in its existing deposit book, largely due to the
demise of the Tier 2 banks in the early part of 2002 and an increase in
available consumer cash. The rural network again contributed strongly to Retail
Bank`s performance, with solid growth in market share of deposits.
Mortgage finance
FNB HomeLoans` contribution was considerably enhanced by its ability to leverage
its infrastructure with the Saambou and NBS acquisitions. The acquired assets
delivered according to expectations, with slower than expected run-offs. FNB
HomeLoans` better than expected organic advances growth has come about due to
buoyancy in the market and record new business payouts.
eBucks
eBucks achieved a maiden profit in the period to 31 December 2002, six months
ahead of target.
Instalment Finance
WesBank continued to achieve record new business production levels, breaking the
R2 billion mark four times in the six months to December 2002. The motor
division has grown 10% relative to the comparative period, while the business
division, as a result of collaboration with FNB Corporate, has grown strongly at
23%, albeit off a lower base. Interest turn is under pressure due to a higher
cost of borrowing and increased margin pressure, as well as the change in
business mix.
Bad debts remain well under control, decreasing in absolute terms in spite of
the increase in advances. Non-performing loans as a percentage of advances are
at 0,85%, the lowest level ever and considerably below historic norms.
African Subsidiaries
The African Subsidiaries benefited from strong growth in interest income due to
widening of margins in a higher interest rate environment and strong growth in
advances. Non-interest income has grown exceptionally well on the back of higher
transaction volumes and good trading results.
Insurance
Year
Six months ended ended
31 December % 30 June
R million 2002 2001 change 2002
OUTsurance (46%) 39 17 >100,0 27
FirstLink 18 9 >100,0 19
Insurance 57 26 >100,0 46
OUTsurance has achieved organic growth in gross premium income of 63% on the
back of aggressive advertising and intensive cross-selling to Origin and FNB
clients. The acquisition of the BoE Home-owners Insurance Portfolio in March
2002 has contributed to increased economies of scale. Expenses as a percentage
of net earned premium have decreased from 35,2% to 25,3%.
FirstLink has grown commission and fee income in the commercial segment by 19%,
against market growth of 10%.
Corporate Cluster
Investment Banking
RMB`s Equities trading and Private Equity divisions achieved excellent results
in spite of difficult market conditions. The Private Equity division has
increasingly diversified its income sources, and was able to achieve good
results in spite of minimal realisations during the period. RMB`s other trading
desks were unable to generate significant profits in an exceptionally difficult
trading environment. Corporate Finance struggled in a very quiet market. In the
prior period, extraordinary losses on the US Corporate Bond portfolios dominated
the Investment Bank`s performance. These losses have not been repeated in the
current period, with the CDO portfolio stabilising.
Corporate Banking
FNB Corporate was negatively impacted by higher bad debt provisioning, the
additional funding cost of carrying investments in Profurn and McCarthy and a
significant decline in demand for advances. Deposit margins have increased
slightly in the higher interest rate environment and, with strong volume growth,
the liability side of the balance sheet has substantially increased its
contribution. Transactional income has also increased although pressure on
pricing continues.
Wealth Cluster
Private Banking - Domestic
First National Trust achieved its targets for the first half of the year
following the automation of its systems. Costs are well controlled and, subject
to market conditions, the division should continue to grow its contribution.
Origin and Ansbacher (SA) have continued to actively grow market share with
advances and deposit growth once again exceeding targets. The integration of the
back offices and management teams of the two operations was completed toward the
end of the previous financial year. The cost savings arising from the synergies
achieved contributed directly to the dramatically improved results in the
current period.
Private Banking - International
The Ansbacher (UK) Group (Ansbacher Group) delivered disappointing results for
the six months to 31 December. The low international interest rate environment
squeezed margins on customer deposits. Poor overall stock market performance
negatively impacted on the Ansbacher Group`s investment advisory services. The
performance of the treasury portfolios was particularly disappointing in
difficult markets. The tightening of the regulatory environment in the United
States forced a reduction in the size of the Caribbean operations. Management is
continuing to evaluate a number of strategic options to improve profitability by
seeking greater economies of scale.
Irish Litigation
In September 1999, Inspectors were appointed under the Irish Companies Act to
investigate certain business which had commenced in 1971 involving Guinness &
Mahon (Ireland) Limited, Guinness Mahon Cayman Trust Limited (GMCT) and its
Irish clients. The Ansbacher Group acquired GMCT (subsequently renamed Ansbacher
(Cayman) Limited in 1988) at a time when the business involving the Irish
clients was declining, a trend that accelerated after the GMCT acquisition.
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 professional advice received, the directors of
FirstRand Bank Holdings Limited are of the opinion that, given the degree of
uncertainty associated with the company`s purported tax liability, any estimate
would be impracticable. Accordingly, no provision can be made in the financial
statements. The Ansbacher Group and its advisors have entered into a process of
engagement with the Irish revenue authorities to resolve the matter.
The Irish Minister of Justice has made an application to obtain reimbursement of
the costs of the enquiry of approximately 2,34 million (Euro 3,6 million)
against Ansbacher (Cayman) Limited 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 in 2004. Ansbacher (Cayman) Limited 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
Although the Banking Group Capital Centre reflected an increase of 197% relative
to the prior period, these results are strongly influenced by the following:
- exceptional bad debt provisions against the debt and preference share
exposures in Relyant and McCarthy which were created in the comparative period;
- considerable benefit derived from the endowment effect on capital as a result
of the high interest rate environment; and
- a reduction in internal incentives paid in respect of structured finance
transactions.
The current level of earnings in the Capital Centre is expected to be sustained
over the full year unless there is a dramatic decline in interest rates before
30 June.
Capital adequacy
The Banking Group continues to actively manage its capital structure to optimise
shareholder returns, while ensuring compliance with the new requirement of 10%.
Current capital adequacy ratios are comfortably within the South African Reserve
Bank (SARB) requirements. The increased requirement makes it more onerous for
the bank to maintain its superior return on capital. The current capital ratios
within the Banking Group are:
R million 2002 2001
Tier 1 8,7 8,4
Tier 2 3,0 3,2
Total capital 11,7 11,6
Contingent liabilities
The Banking Group, through a number of its subsidiary companies, is involved in
legal actions in various jurisdictions arising from its normal business. No
material adverse impact on the financial position of the Banking Group is
expected to arise from these actions.
AC133
"Financial instruments: Recognition and measurement"
Introduction
AC133 is a prospective accounting statement and does not provide for the
restatement of historical numbers. It rather provides comprehensive transitional
provisions, which affect opening equity. The adjustments to opening equity of
the Banking Group are set out below.
Effect of implementation of AC133
The tables below provides disclosure of the adjustments required to equity of
the Banking Group as a result of the implementation of AC133, together with
accompanying commentary.
General provisions
Prior to the implementation of AC133, the Banking Group, consistent with
existing banking industry practice, calculated a general provision for bad debts
by applying the expected default frequencies to its advances book. This,
calculated at a portfolio of advances and product level, gave rise to a total
provision of approximately 1,1% of advances.
AC133 prescribes that a cash flow valuation methodology be used in calculating
provisions going forward. This methodology requires that all future expected
cash flows, including interest income be taken in to account in this
calculation.
The credit risk premium included in interest charged to clients therefore
offsets future losses to the extent that risk pricing has been correctly
applied. The Banking Group`s credit model includes risk pricing and consequently
the general provision reduces to an amount close to zero in terms of AC133.
The impact of this adjustment is set out in the table below:
Dec Dec June
R million 2002 2001 2002
Retained income increases by* 1 581 1 226 1 560
Current income increases by* 123 126 295
General Provisions decrease by 2 128 1 610 2 065
* After tax
An impaired reserve equal to the released general provision has been created in
order to meet the provisioning requirements of the regulations to the Banks Act.
Dec Dec June
R million 2002 2001 2002
Retained income decreases by 1 581 1 226 1 560
General risk reserve increases by* 1 181 1 226 1 560
Revaluation reserves increase by 400 - -
* Net of tax
Impact on opening equity
Revalu- General
Retained ation risk
R million income reserve reserve Total
Closing balance at
30 June 2002 12 343 - - 12 343
Retained income
adjustment for:
- Present value
adjustment for
off-market loans1 (192) - - (192)
- Present value
adjustment for
specific
loan provisions2 (193) - - (193)
- Non-qualifying
interest
rate hedges3 (148) - - (148)
- Present value
adjustment for
general
loan provisions4 1 581 - - 1 581
- Creation of a
General
risk reserve
(impaired
capital reserve)5 (1 581) 400 1 181 -
- Revaluation of held
for
trading portfolios6 232 - - 232
Revaluation reserve
adjustment for:7
- International
credit portfolios - (891) - (891)
- Other portfolios - 66 - 66
Restated opening
balance 12 042 (425) 1 181 12 798
Impact on current period income and equity
Revalu- General
Current ation risk
R million income reserve reserve Total
Present value
adjustment for
off-market loans1 36 - - 36
Present value
adjustment for specific
loan provisions2 (2) - - (2)
Non-qualifying interest
rate hedges3 106 - - 106
Present value
adjustment for general
loan provisions4 123 - - 123
Revaluation of held for
trading portfolios (29) - - (29)
Revaluation reserve
adjustment for:6
- International
credit portfolios - 103 - 103
- Other portfolios - 42 - 41
Adjustment against
income for the period 233 145 0 378
Transfer to General
risk reserve (impaired
capital reserve)5 (123) - 123 -
Adjustments
for the period 110 145 123 378
In accordance with the provisions of AC133, FirstRand has elected to account for
all fair value changes on available for sale ("AFS") financial assets through
the balance sheet.
1 AC133 requires that loans and advances at off-market rates be present valued.
This gives rise to an "up front loss" on inception of such loans, which then
gradually unwinds over the life of the transaction through the income statement.
The Banking Group has loans to share trusts established on behalf of employees,
which carry an interest rate equivalent to the dividend flow of the underlying
shares.
2 A major change introduced by AC133 is that provisions for impairment of
advances, on an individual or portfolio basis, must be calculated using a
present value methodology, based on expected future cash flows of identified
impaired advances or losses inherent in a portfolio of advances. This results in
an increase in specific provisions previously provided to take account of the
delay in collection of the recoverable amount.
3 AC133 sets onerous requirements before hedge accounting can be applied,
including restrictions on use of partial hedges, internal hedges and net
hedging. While the Banking Group has complied with these requirements in certain
circumstances, in other situations, where the cost of complying exceeds any
tangible business benefit, the Banking Group has elected to reflect the hedges
through the income statement.
4 The present value calculation applied in AC133 requires that all future cash
flows, including future interest payments, be taken into account in the creation
of bad debt provisions. If the risk pricing methodology of an enterprise is
correct, the risk premium inherent in future interest flows should compensate
for the risk inherent in the underlying capital amount. Consequently, the
specific provision is supplemented by taking account of provisions required
where market conditions have changed and the Banking Group has been unable to re
price to compensate for the change in risk. This provision is included in
adjustment 2 above. The general provision, which pre- AC133 took account of the
inherent risk in the book, without adjusting for the risk premium, is no longer
permitted under AC133, although still required for SARB reporting (refer 5
below)
5 The General risk reserve is created to comply with the minimum provisioning
levels required in terms of the SARB. The formulistic approach prescribed by the
SARB results in levels of provisioning which incorporate "unexpected losses" in
a portfolio of advances. To the extent that general or specific provisions
created relate to advances now held as "available for sale", these provisions
have been included in the revaluation reserve column of the statement of changes
in equity of the Banking Group.
6 Investment banking assets previously held at cost, now designated at fair
value. This category includes Private Equity investments.
7 Adjustment relating to the measurement of AFS financial assets to fair value
or amortised cost, on 1 July 2002 and at the reporting date.
Prospects
PROSPECTS
The Banking Group will continue to benefit from strong external focus and the
foundations established over the past four years. The resilient and diverse
earnings base will continue to support overall growth going forward. We are
confident that, bar unforeseen circumstances, the Banking Group can continue its
pleasing growth of the first six months.
On behalf of the directors
GT Ferreira PK Harris
Chairman Chief Executive Officer
FirstRand Bank Holdings Limited
(Registration No 1971/009695/06)
Registered Office
1st Floor, 4 Merchant Place, Cnr Fredman Drive and Rivonia Road, Sandton, 2196
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 and its divisions, associates and
subsidiary companies, including Momentum Life, Momentum International, Momentum
Employee Benefits, FirstRand Asset Management and Discovery Holdings,
collectively referred to as the Momentum group.
Salient features
Pre AC133 Post
AC133
Group headline earnings +4,4% +1,8%
Return on embedded value 12,3% 11,8%
Headline operating profit on
individual business +23,0% +20,5%
Investment income on
shareholders` assets +24,7% +24,7%
Assets under management
and administration R184,5bn R184,5bn
This circular is available on our website at: www.momentum.co.za
E-mail questions to: asktheCFO@momentum.co.za
Income statement
Unaudited six months ended
31 December
Pro forma1 Pro forma1
R million 2002 2001 % change
Group operating 402 404 -
profit
Investment income on
shareholders` assets 121 97 24,7
Group headline 523 501 4,4
earnings*
*Group headline
earnings is shown
after
charging the
following
shareholders
and policyholders`
taxation:
Direct taxation 207 295 (29,8)
Indirect taxation 66 58 13,8
Total taxation 273 353 (22,7)
Headline earnings
reconciliation
Earnings 340 480 (29,2)
attributable to
shareholders
Add: Goodwill 17 19
amortised
Add: Goodwill 166 -
impaired
Add: Loss on sale - 2
of assets
Less: Abnormal
profit on release
of reserves - -
Less: Profit on
disposal of
subsidiary shares - -
Group headline 523 501 4,4
earnings
Audited
Unaudited six months ended Year
31 December
ended
Actual2 Actual 30 June
2002 2001 % change 2002
389 404 (3,7) 848
121 97 24,7 190
510 501 1,8 1 038
205 295 (30,5) 623
65 58 12,1 131
270 353 (23,5) 754
327 480 (31,9) 825
17 19 54
166 - 210
- 2 4
- - (28)
- - (27)
510 501 1,8 1 038
Notes
1. The pro forma columns exclude the effect of AC133.
2. The actual column for 2002 includes the effect of AC133.
Balance sheet
Unaudited
Unaudited at 31 December Actual Audited
Pro forma Actual 31 Dec 30 Jun
2002 2001 2002 2002
ASSETS
Investment assets 82 651 84 262 82 600 83 412
Funds on deposit 14 061 8 074 14 061 13 403
Government and public 11 650 9 095 11 650 9 868
authority stocks
Debentures and other 12 765 8 384 12 714 9 675
loans
Policy loans 578 549 578 580
Equity investments 35 316 50 236 35 316 40 213
Investment in 572 506 572 566
associated companies
Derivative 4 783 4 425 4 783 6 203
instruments
Property investments 2 926 2 993 2 926 2 904
Current assets 6 901 4 429 6 901 7 462
Deferred taxation 4 6 4 11
asset
Intangible assets 469 1 251 469 748
Property and 640 625 640 636
equipment
Total assets 90 665 90 573 90 614 92 269
LIABILITIES AND
SHAREHOLDERS` FUNDS
Current liabilities 5 287 2 408 5 287 6 129
Taxation 168 279 168 78
Derivative 4 307 5 169 4 464 5 690
instruments
Deferred taxation 267 - 267 357
liability
Post-retirement 294 335 294 313
medical liability
Long-term liabilities 1 834 2 157 1 834 1 990
Policyholder 73 753 76 079 73 596 73 399
liabilities
Policyholder 73 753 76 079 38 085 73 399
liabilities under
insurance contracts
(previously Life
Fund)
Policyholder - - 35 511 -
liabilities under
investment contracts
Outside shareholders` 802 554 791 603
interest
Share capital and 3 953 3 592 3 913 3 710
reserves
Total liabilities and 90 665 90 573 90 614 92 269
shareholders` funds
Total assets under 184 526 209 193 184 475 190 597
management and
administration
Accounting policies
The accounting policies applied are in accordance with Statements of Generally
Accepted Accounting Practice. These accounting policies are consistent with
those of the year ended 30 June 2002, except for the changes made to comply with
Accounting Standard AC133 - Financial Instruments: Recognition and Measurement,
which became effective from 1 July 2002. The group has implemented AC133 on the
following basis:
- Insurance contracts as defined in AC125 continue to be valued and disclosed in
terms of the Financial Soundness Valuation (FSV) basis as contained in PGN104
issued by the Actuarial Society of South Africa. These liabilities are reflected
as "Policyholder liabilities under insurance contracts (previously Life Fund)";
- Investment contracts that do not comply with the definition of insurance
contracts have been reflected separately in the group balance sheet as
"Policyholder liabilities under investment contracts". The premium income,
benefit payments, investment income as well as the realised and unrealised
investment surpluses on the assets backing these investment contracts, have been
excluded from the income statement and accounted for directly against the
liability under these contracts. Fees earned from these products are included in
the investment income line;
- These investment contracts have been accounted for in the financial statements
at fair value, with changes in fair value being accounted for in the income
statement.
There is an ongoing process to develop guidance in the long-term insurance
industry with regard to the classification of policyholder contracts between
insurance contracts and investment contracts in terms of AC133, as well as the
valuation basis for such investment contracts. The implementation of updated
guidance may have a further impact on the financial results for the year-end.
The following table illustrates the effect of AC133 on the income statement for
the six months ended 31 December 2002, and the balance sheet at 31 December
2002, by detailing these items subsequent to the implementation of AC133, and as
they would have been calculated prior to AC133:
31 Dec 31 Dec
2002
2001
Post- Pre- Pre-
R million AC133 AC133 AC133
Income statement items
Group headline earnings1 510 523 501
Net premium income 5 215 9 896 10 337
Investment income 1 951 2 729 2 810
Policyholder benefits (3 765) (7 334) (9 198)
Realised and unrealised
investment (deficits)/surpluses (1 607) (2 137) 6 547
Balance sheet items
Derivative liabilities2 4 464 4 307 5 690
Policyholder liabilities 73 596 73 753 73 399
Policyholder liabilities
under insurance contracts 38 085 73 753 73 399
Policyholder liabilities under
investment contracts 35 511 - -
1 The reduction in group headline earnings following the application of AC133 is
due to a change in the valuation of share trust loans. These loans have been
classified as loans on off-market terms, whereas previously these loans were
reflected at historical cost.
2 The increase in derivative liabilities is due to the separate disclosure of
derivatives embedded in insurance contracts. In terms of AC133, these embedded
derivatives, previously included in the policyholder liabilities under insurance
contracts, have been fair valued and disclosed separately.
Review of group results
The results of the Momentum group are pleasing considering the poor performance
of global equity markets, as well as the negative effects of the stronger rand
on offshore earnings. Group headline earnings increased by 2% to R510 million
for the six months, with group operating profit decreasing marginally and
investment income on shareholders` assets increasing by 25%. The most pleasing
aspect of these results was the increase of 21% in Momentum`s individual
business operating profit after tax.
The volatility and uncertainty in global financial markets experienced during
the year to 30 June 2002 continued during the six months ended 31 December 2002.
Global equity markets continued their negative trend, with the MSCI World Index
declining by 12% in US dollar-terms over the past six months, and by 25% in US
dollar terms over the past 18 months. The strengthening of the rand, although
positive for local inflation and interest rates, had a negative effect on
offshore-based fee income. The South African markets did not escape the global
uncertainty, with the JSE ALSI40 index declining by 15% during the six months
under review. Overall market conditions are not conducive to attracting
discretionary or retirement savings. Our asset management operations were
especially hard hit by the declining markets and the stronger rand, as well as
by a net outflow of investment funds.
Group operating results
The following table reflects the main components of the increase in group
headline earnings for the period:
Six months ended Year
ended
31 Dec 30 Jun
2002 2001 % 2002
Earnings source Rm Rm change Rm
Insurance 253 220 15,0 489
operations
Individual business 194 161 20,5 382
Employee benefits 59 59 - 107
Asset management
operations 86 134 (35,8) 228
Discovery Holdings 50 55 (9,1) 131
eBucks - (5) - -
Group operating
profit 389 404 (3,7) 848
Investment income
on shareholders`
assets 121 97 24,7 190
Group headline
earnings 510 501 1,8 1 038
Group core
operational
headline
earnings1 510 501 1,8 1 038
1 Defined as group headline earnings excluding foreign currency translation
gains. As the group has no offshore entities that are classified as integrated
foreign operations, there are no foreign currency translation gains included in
headline earnings.
Insurance operations
Individual business
The individual business continued its good performance of the prior year, with
operating profit increasing by 21% to R194 million for the six months. These
results reflect a strong allround performance from most business units. A number
of innovative risk and investment products were launched, on which we
experienced very pleasing new business sales. The results also benefited from a
reduction in the effective tax rate compared with the prior period.
New individual life recurring premium business (excluding Discovery Life)
increased by 22% compared to the prior period. This figure excludes automatic
premium escalations, which totalled R90 million for the six months. Individual
life single premium production increased by 15%, mainly due to a 30% increase in
immediate annuity sales. Details regarding new business production can be found
in the table headed "New Business" elsewhere in this report.
It was mentioned in the 2002 year-end results announcement that we were
concerned about our dependence on offshore investment capacity for new business.
We are pleased to report that locally-based investment portfolios increased as a
proportion of new individual life production (recurring plus single) from 75% in
the 2002 financial year, to 83% for this past six months.
Momentum International, which comprises the locally-based Momentum MultiManagers
and the UK-based Ansbacher MultiManagers, experienced lower earnings due to the
negative effect of declining investment markets, in particular global equity
markets. Capacity building in these businesses also resulted in increased
expenditure. Total assets under management declined from R27,3 billion at 30
June 2002, to R24,0 billion at 31 December 2002.
Employee benefits
The results of Momentum Employee Benefits (MEB) were in line with last year.
Whilst underwriting margins have improved, new risk business production has
suffered as a result of the repricing required to improve profitability.
Therefore, overall underwriting profits remained at similar levels to the prior
period. Risk underwriting profits currently account for approximately 65% of the
total earnings of MEB.
Asset management operations
The operations of FirstRand Asset Management (FRAM) comprise RMB Asset
Management (RMBAM), FirstRand International Asset Management, RMBAM Ireland, 87%
of the Jersey General Group (Ashburton), RMB Properties and 40% of Futuregrowth.
FRAM generated an operating profit after tax of R86 million for the period, 36%
below the profit in the prior year. The three main reasons for this decline were
a net outflow of funds, the poor performance of global and local investment
markets and the negative effect of the strengthening of the rand on offshore-
based fee income.
FRAM`s assets under management currently amount to R136 billion (30 June 2002:
R142 billion), of which R84 billion (30 June 2002: R88 billion) represent off-
balance sheet funds with the balance being group assets managed.
RMBAM`s shorter term investment performance has continued to improve, with the
RMB Managed Fund`s one year performance improving from 5th out of 10 funds at 30
June 2002 to 3rd out of 10 funds at 31 December 2002 in the Alexander Forbes
Global Large Manager Watch. This fund`s performance, in the same survey, ranks
5th out of 10 and 4th out of 9 over three and five years respectively.
As mentioned in the results announcement for the year ended 30 June 2002, the
carrying value of FRAM`s 87% shareholding in Ashburton was impaired by an amount
of R210 million. Due to the further decline in international equity markets
since 30 June 2002, and the general uncertainty globally with regard to the
direction of investment markets, a further impairment of R166 million has been
charged against attributable earnings during the current period. Ashburton
currently manages GBP583 million in retail assets (R8,1 billion) compared with
GBP706 million (R11,1 billion) at 30 June 2002.
Discovery Holdings
The performance of Discovery over the first six months of the 2003 financial
year has been pleasing. Discovery`s health business continues to consolidate its
leadership position locally, while transferring its unique capabilities to the
US market. To leverage this, a significant agreement with a major US insurance
company is in the process of being concluded. The Momentum group`s 62% share of
Discovery`s headline earnings have decreased by 9%, whilst Discovery reported
headline earnings per share in line with the prior period. The difference is due
to:
- the dilution in Momentum`s shareholding following the issue of additional
shares to the Discovery Share Incentive Scheme, as well as;
- the reversal of Discovery`s consolidation of their share incentive scheme. The
FirstRand group policy is not to consolidate share incentive schemes, and this
reversal has resulted in an impairment of the Discovery share incentive scheme
loan, being an off-market loan, in terms of AC133 amounting to R7 million during
the current period.
New business volumes at Discovery Health increased by 27% (including Vitality)
over the comparative period, whilst Destiny Health, the US health insurance
operation, increased new business by 84% from US$10,7 million in the prior
period to US$19,7 million for the past six months. Discovery Life`s new business
growth of 96% was fuelled by the launch of the integrator product, and the
expansion of the franchise network.
Discovery`s embedded value increased by 13% over the six months to R3 611
million at 31 December 2002, including the embedded value of Destiny Health.
Investment income on shareholders` assets
The investment income earned on shareholders` assets increased by 25% to R121
million. The main reason for the increase is the higher cash balance in the
shareholders` portfolio arising from:
- the decrease in dividends paid following a change in the dividend cover from
2,2 times to 2,8 times, to bring Momentum`s dividend policy in line with the
FirstRand group policy; and
- the sale of surplus shares in the Momentum and Southern share incentive
schemes, which realised R140 million in cash.
The actuarial values of shareholders` net assets at 31 December 2002 were:
31 Dec 30 Jun
Actuarial value of 2002 2002
shareholders` net assets Rm Rm
Strategic subsidiary investments1:
- Discovery Holdings (62%) 1 975 1 777
- FirstRand Asset Management 1 495 1 603
- Momentum MultiManagers 40 40
Shareholders` portfolio investments1:
- African Life (34%) 533 557
- Fixed interest instruments 529 572
- Equities 141 132
- Properties 280 268
- Share trust and subsidiary loans 508 589
- Cash and other 984 626
Total shareholders` net assets 6 485 6 164
1 Strategic subsidiary investments are reflected at directors` valuation. 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.
CAPITAL ADEQUACY
The excess of assets over liabilities of Momentum Group Limited was R6 485
million at 31 December 2002 (30 June 2002: R6 164 million). The capital adequacy
requirements (CAR) of R2 936 million were covered 2,2 times (30 June 2002: 2,4
times) by this excess.
The new capital adequacy guidelines issued for final comment by the Financial
Services Board during December 2002 will, according to these guidelines, become
applicable to Momentum from its financial year commencing 1 July 2003. These new
guidelines require a more conservative valuation of strategic subsidiary
investments. Based on the application of the transitional arrangements detailed
in the new guidelines, Momentum`s CAR cover would reduce to 1,7 times at 31
December 2002. We regard this level of cover to be acceptable given the current
asset composition of the shareholders` investments.
RESULTS OF THE EMBEDDED VALUE CALCULATION
The embedded value of Momentum Group, representing the sum of the shareholders`
net assets and the present value of expected future profits arising from the
existing in-force insurance business, totalled R9 876 million at 31 December
2002 (30 June 2002: R9 532 million). The embedded value calculation includes
Momentum Group`s 62% share of the market value of Discovery Holdings, as well as
the unlisted strategic subsidiary companies at directors` valuation (see table
above). The analysis of the main components of the group embedded value is
reflected in the following table:
31 Dec 30 Jun
2002 2002
Embedded value Rm Rm
Actuarial value of shareholders` net 6 485 6 164
assets
Net value of in-force insurance 3 391 3 368
business
Value of in-force insurance business 3 680 3 611
Opportunity cost of capital adequacy
requirements (289) (243)
Embedded value 9 876 9 532
The embedded value of the six months` new business amounted to R131 million,
compared with R120 million for the corresponding period in the prior year. The
value of new business written during the six months represented 15% of notional
new business premiums, compared with a margin of 16% for the year ended 30 June
2002. This decline was mainly due to a change in the business mix.
The embedded value profit for the six months to 31 December 2002 totalled R547
million, which represents an annualised return of 11,8% on the opening embedded
value. The following table provides an analysis of the embedded value profit for
the six months into its main components:
Analysis of movement in embedded value Rm
Embedded value at 30 June 2002 9 532
Embedded value profit 547
Factors related to operations: 421
Value of new business 131
Expected return on new business 5
Expected return on existing business 268
Experience assumption changes (27)
Operating experience variations 44
Factors related to market conditions: 126
Investment return on shareholders` net assets 244
Change in economic assumptions 199
Investment variations (317)
Less: Dividends paid (203)
Embedded value at 31 December 2002 9 876
The following table shows the main economic assumptions used in calculating the
embedded value at 31 December 2002:
31 Dec 30 Jun
2002 2002
Economic assumptions % %
Risk discount rate 14,0 15,5
Investment returns
(before tax) 12,0 13,5
Expense inflation rate 8,0 9,5
The adjustments to these assumptions from 30 June 2002 to 31 December 2002
reflect the decrease in long-term interest rates over the period. These changes
in economic assumptions resulted in an increase of R199 million in the embedded
value.
GROUP ASSETS UNDER MANAGEMENT AND ADMINISTRATION
The Momentum group managed or administered total assets of R184,5 billion at 31
December 2002 compared with R190,5 billion at 30 June 2002, a decrease of 3%
over the six-month period. This decrease is mainly due to the decline in
investment markets during the six months and includes the negative effect of the
rand`s strengthening on foreign currency assets. The following table provides an
analysis of the assets managed or administered by group companies:
31 Dec 30 Jun
Assets under management 2002 2002 %
and administration Rbn Rbn change
On-balance sheet assets 90,6 92,2 (2,0)
Assets managed on behalf
of third parties 73,5 75,2 (2,3)
Unit trust funds managed 14,6 16,9 (13,6)
Assets under management 178,7 184,3 (3,0)
Linked product assets
under administration1 5,8 6,2 (6,5)
Total assets under management
and administration 184,5 190,5 (3,1)
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
R13,0 billion (30 June 2002: R13,9 billion).
Funds received from clients
New business inflows for the six months to 31 December 2002 totalled R12,1
billion, a decline of 35% compared with the corresponding figure in the prior
year. However, new annualised recurring premium business increased by an
excellent 31%, thanks to strong performances from the individual life and health
insurance businesses. Lump sum inflows were disappointing, with unit trust,
employee benefits and segregated third party funds suffering from the
instability experienced by financial markets during the period under review. A
breakdown of the new business inflows, which include 100% of the Discovery
figures, is provided in the table below:
Six months ended Year
ended
31 Dec 30 Jun
2002 2001 % 2002
New business Rm Rm change Rm
Annualised
recurring
premiums 1 981 1 514 30,8 3 030
Individual life1 520 391 32,9 818
Employee benefits1 78 61 27,9 137
Health insurance 2 1 383 1 062 30,2 2 075
Lump sum inflows 8 321 9 745 (14,6) 17 456
Individual life
premium income 1 687 1 467 15,0 3 021
Corporate policy
premium income 2 236 1 090 >100,0 1 240
Employee benefits
premium income 831 1 451 (42,7) 2 927
Linked product
sales3 1 309 1 110 17,9 2 920
Unit trust sales
- local 1 693 3 107 (45,5) 5 245
Unit trust sales
- offshore 565 1 520 (62,8) 2 103
Segregated third
party inflows4 1 821 7 418 (75,5) 10 665
Total new business
inflows 12 123 18 677 (35,1) 31 151
1 Includes the new annualised premiums relating to the sales of Discovery Life
products of R168 million (2001: R103 million) under individual life business and
R35 million (2001: R7 million) under employee benefits business. These figures
exclude automatic premium increases of R90 million for Momentum and R12 million
for Discovery Life.
2 Includes the new annualised premiums relating to the sales of Destiny Health
products of R187 million (2001: R119 million).
3 Includes sales of products on the life insurance balance sheet amounting to
R520 million (2001: R472 million).
4 The figure for the comparative period 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.
As detailed in the notes to the table above, the segregated third party inflows
in the comparative period included a once-off institutional inflow of R5,1
billion, which if excluded, brings the decline in total new business down to
11%.
If the inflows from existing business are added to the new business inflows
detailed above, the total funds received from clients amounted to R14,1 billion
for the six months, a decrease of 33% compared with the corresponding period.
The following table provides an analysis of these inflows:
Six months ended Year
ended
31 Dec 30 Jun
Funds received 2002 2001 % 2002
from clients Rm Rm change Rm
Individual life
premium
income 5 716 4 138 38,1 7 474
Single premiums1 1 687 1 467 15,0 3 021
Corporate policy
premiums 2 236 1 090 >100,0 1 240
Recurring premiums 1 793 1 581 13,4 3 213
Employee benefits
premium income 1 503 2 059 (27,0) 4 309
Single premiums 831 1 451 (42,7) 2 927
Recurring premiums 672 608 10,5 1 382
Health insurance
net inflows 1 586 1 656 (4,2) 3 132
Gross inflows 4 626 3 480 32,9 7 545
Less: Medical
scheme and money
market (2 963) (1 674) (77,0) (4 234)
contributions
Less: Reinsurance
premiums (77) (150) 51,3 (179)
Linked product 1 309 1 110 17,9 2 920
sales
Unit trust sales 2 258 4 627 (51,2) 7 348
Local 1 693 3 107 (45,5) 5 245
Offshore 565 1 520 (62,8) 2 103
Segregated third
party inflows 1 766 7 418 (76,2) 10 665
Total funds
received
from clients 14 138 21 008 (32,7) 35 848
1 Single premiums exclude the reinvestment of matured policies, amounting to
R272 million (2001: R210 million).
All transfers between on- and off-balance sheet funds have been excluded from
the above.
Payments to clients
The Momentum group managed to contain outflows during the six months under
review, achieving a 25% reduction in payments to clients. All business lines,
except corporate policies and individual life, showed significant decreases in
fund outflows. Local unit trust repurchases reflected a pleasing decline, whilst
the level of repurchases in the offshore unit trusts were reduced further by the
strengthening in the rand. The total outflows to clients are analysed in the
following table:
Six months ended Year
ended
31 Dec 30 Jun
Payments to 2002 2001 % 2002
clients Rm Rm change Rm
Individual life 2 726 2 717 0,3 5 561
Corporate 928 413 >100,0 669
policies
Employee 1 793 2 027 (11,5) 4 287
benefits
Health insurance 763 981 (22,2) 1 722
Linked products 1 067 1 266 (15,7) 2 491
Unit trusts - 1 738 3 421 (49,2) 5 085
local
Unit trusts - 723 1 254 (42,3) 1 716
offshore
Segregated third
party funds 4 252 6 604 (35,6) 10 593
Total payments
to clients 13 990 18 683 (25,1) 32 124
Net flow of funds
The net flow of funds from clients was marginally positive during the six
months. Individual life net cash inflows have more than doubled from the prior
period, thanks to well-contained outflows and strong annuity sales. Linked
product net cash flows reflected a pleasing turnaround, as did local unit trust
cash flows.
The following table identifies the components of this net inflow of funds, which
takes account of the total inflows set out above and the payments to clients for
the six months:
Six months ended Year
ended
31 Dec 30 Jun
2002 2001 % 2002
Net flow of Rm Rm change Rm
funds
Individual 754 331 >100,0 673
life
Corporate 1 308 677 93,2 571
policies
Employee (290) 32 >(100,0) 22
benefits
Health 823 675 21,9 1 410
insurance
Linked 242 (156) >100,0 429
products
Unit trusts
- local (45) (314) 85,7 160
Unit trusts
- offshore (158) 266 >(100,0) 387
Segregated
third
party funds (2 486) 814 >(100,0) 72
Total net flow
of funds 148 2 325 (93,6) 3 724
As noted under the commentary regarding new business inflows, if the once-off
institutional inflow of R5,1 billion is excluded from the net flows of the
comparative period, then net inflows showed an excellent improvement from R2,7
billion negative in the prior period, to R148 million positive for this past six
months.
PROSPECTS
The continued uncertainty regarding the future direction of global markets make
it difficult to project earnings growth for the remainder of the financial year.
However, the strong performance from Momentum`s individual business is expected
to continue, with a number of growth initiatives planned, such as an expansion
of our agency force and the planned launch of a number of innovative new
products. The asset management operations are especially sensitive to investment
market fluctuations, and earnings in this area will continue to be dependent on
the performance of these markets.
3 March 2003
L L Dippenaar H P Meyer
Chairman Managing Director
Momentum Group Limited
Reg No 1904/002186/06
Registered Office
Momentum, 268 West Avenue, Centurion, 0157.
FirstRand
www.firstrand.co.za
Date: 03/03/2003 07:46:00 AM Supplied by www.sharenet.co.za
Produced by the JSE SENS Department