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FirstRand Limited - Unaudited interim results

Release Date: 03/03/2003 07:46
Code(s): FSR
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

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