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Firstrand Limited - Audited Results For The Year Ended 30 June 2005
Firstrand Limited
(Registration No: 1966/0101753/06)
JSE Code: FSR
ISIN: ZAE000066304 ("FSR")
NSX share code: FST
Audited results for the year ended 30 June 2005
additional information is available at www.firstrand.co.za
Headline earnings per share +32%
Headline earnings +32%
Dividend per share +20%
Total assets under management or administration +16%
Introduction
This report covers the financial results of FirstRand Limited ("FirstRand"), its
wholly-owned subsidiaries FirstRand Bank Holdings ("the Banking Group") and
Momentum Group Limited, and its 64,7% subsidiary Discovery Holdings Limited.
Comprehensive report on the operations of the Group will be circulated to
shareholders and is available on the company website - www.firstrand.co.za
The FirstRand Group of companies produced an excellent performance, continuing a
seven-year history of strong growth in headline earnings, ROE and dividends. The
year under review was a challenging but rewarding one with all the major
business units of the Group delivering strong top-line growth. This performance
was assisted by buoyant market conditions but in addition the Group"s
diversified income streams, relentless focus on innovation and its ability to
leverage its many different businesses to create "greenfields" or new sources of
growth, resulted in a 32% increase in headline earnings to R7.6 billion. After
excluding the impact of foreign currency translations the growth was 20%.
These results were achieved in a favourable economic environment, which provided
strong organic growth opportunities, particularly for the Banking Group. This
was evident in the high levels of new business growth at Rand Merchant Bank
("RMB"), WesBank and First National Bank ("FNB") and resulted in the Banking
Group producing headline earnings growth of 35% to R6.5 billion. The sustained
lower interest rate environment continued to result in a margin squeeze, the
impact of which was partly offset by improved credit quality and a lower bad
debt charge, as well as an absolute increase in advances and deposits.
Momentum produced excellent results by growing headline earnings by 19% to R1
287 million, with earnings attributable to ordinary shareholders increasing by
28%. These results were driven by strong new business inflows, significant
growth in assets under management and a focus on expense efficiencies.
Discovery delivered a strong performance for the year under review with headline
earnings increasing by 32% to R350 million. This performance reflects strong
growth in all Discovery"s businesses, with new business Annual Premium Income
(API) increasing by 35% to R4 342 million.
The Group"s performance in summary is:
Audited
R `million 30 June 2005 30 June 2004 % growth
Headline earnings for the 7 602 5 763 32
FirstRand Limited Group
Currency translation
(gains)/losses on integrated
foreign operations
- Banking Group (264) 370 >100
Headline earnings excluding 7 338 6 133 20
impact of foreign currency
translations
Cents
Earnings per share (cents)
- Basic 154.3 110.0 40
- Diluted 151.2 107.4 41
Headline earnings per share
(cents)
- Basic 146.2 111.0 32
- Diluted 143.3 108.4 32
Headline earnings excluding
impact of foreign currency
translations per share
(cents)
- Basic 141.1 118.1 19
- Diluted 138.3 115.3 20
The relative contributions to headline earnings excluding the impact of foreign
currency translations by the three main operating subsidiaries were:
Contribution 30 June 2005 30 June 2004
Banking Group 79.2% 78.1%
Momentum 16.4% 17.6%
Discovery 4.4% 4.3%
Total 100% 100%
Performance against targets
The Group determines performance
using two financial targets:
Financial targets Target Actual
10% Real growth in headline earnings 13.5% 20%
Return on equity: 10% plus FirstRand 22.9% 27%
weighted average cost of capital
These targets exclude the impact of foreign currency translations.
OPERATING ENVIRONMENT
The year was characterised by continued growth in consumer spending, strong
increases in corporate output, rising business fixed investment, net new
employment creation, a buoyant property market and sharply rising share prices,
against a backdrop of low inflation and interest rates. The global economy
expanded at its fastest pace in over two decades. As a consequence, commodity
prices and international trade volumes soared. This continued growth in the
global economy was largely driven by strong consumer spending, large increases
in residential building activity and a solid expansion in fixed investment
generally.
Local markets adapted to the structurally lower interest rate and inflation
environment with asset prices experiencing strong increases. The property, bond
and share markets all experienced substantial gains. Many households therefore
enjoyed both "wealth effects", which encouraged them to spend while enjoying the
benefit of much lower borrowing costs.
Local equity markets were buoyant and this had a positive impact on the Group"s
equity related businesses. The JSE ALSI 40 index increased by 40% during the
year.
Sales of discretionary linked investment products, unit trusts and living
annuities benefited from the improved equity markets. As was to be expected, the
lower interest rates impacted negatively on sales of guaranteed annuities and
guaranteed endowments, and the stronger Rand resulted in very low demand for
offshore products.
The long-term insurance industry continued to experience strong demand for
individual risk products during the period.
STRATEGIC ISSUES
Brand alignment - The Banking Group
In October 2004, the retail, wealth and corporate clusters were dismantled and
the Banking Group was restructured.
FNB Corporate and FNB Retail were merged under one FNB management team. This
decision was taken to better position FNB to:
- achieve greater collaboration and inter-dependence;
- leverage and build the FNB brand; and
- maximise revenue growth going forward.
The large corporates market segment is now managed jointly by RMB and FNB, with
RMB providing value-add advisory and structuring services and FNB managing
transactional banking business. This is working well as there is a more
efficient working relationship between FNB and RMB, and large corporates are
benefiting from the increased customer focus.
Black Economic Empowerment ("BEE") ownership transaction ("the BEE transaction")
FirstRand announced details of its BEE transaction on 24 February 2005, in terms
of which an effective 10% interest in FirstRand would be acquired by four broad-
based empowerment groups and black South African FirstRand staff and non-
executive directors.
The BEE transaction comprised two components. Four broad-based BEE groups,
Kagiso Trust, Mineworkers Investment Trust ("MIT"), WDB Trust and the FirstRand
Empowerment Foundation (a newly created FirstRand BEE entity, with a mandate for
broad-based transformation), will hold a 6.5% interest in FirstRand. This will
be held through the FirstRand Empowerment Trust, a trust created for the
purposes of this transaction. FirstRand"s black South African staff and non-
executive directors will have a beneficial interest of 3.5% in FirstRand. To
implement the BEE transaction, approximately 7.6% of FirstRand"s issued ordinary
shares was procured from shareholders at a price of R12.28 per share.
The FirstRand Empowerment Trust secured third party funding to acquire its 6.5%
interest in FirstRand. FirstRand funded the 3.5% staff BEE component through the
available resources of its subsidiary FirstRand Bank. To provide sufficient
security to the third party funders and for the transaction to be viable with
limited further involvement from FirstRand, the Group issued 119 million
FirstRand ordinary shares to the FirstRand Empowerment Trust at par value. This
aspect of the BEE transaction led to a dilution of approximately 2.1% for
FirstRand shareholders.
The total cost to shareholders of the FirstRand BEE transaction is 3.15% of the
market capitalisation calculated at a share price of R12.28. The Group is
committed to transformation in South Africa and specifically wishes to ensure
that the long-term benefits of the BEE transaction reach the widest possible
community of black South Africans, with a specific focus on the lower income
groups.
The Group selected its BEE partners because they share FirstRand"s objectives of
enhancing broad-based BEE by addressing the needs of a wide constituency. In
addition, the BEE partners have excellent reputations, successful track records
and long standing relations with FirstRand and with each other.
Ansbacher
In July 2004 FirstRand agreed to dispose of its interest in its subsidiary
Ansbacher (UK) Group Holdings Limited ("Ansbacher") to Qatar National Bank
("QNB") at a premium to net asset value.
The proceeds of the sale consisted of two amounts. The initial consideration was
based on the net asset value of Ansbacher at the completion date plus a premium
of GBP7.5 million (R1 019 million). A deferred consideration ("the residual
premium" of GBP7.5 million) will be based on the performance of certain of
Ansbacher"s businesses during the 2005 and 2006 calendar years. Management
believes the current performance of these businesses should not result in
receipt of the residual premium. The transaction became effective on 1 November
2004 and the net proceeds received were GBP91.1 million.
Sage
In May 2005 Momentum announced that it would acquire 100% of Sage Group Limited
("Sage"). Momentum currently has a small presence in the market segment that is
serviced by agents and Sage provides the benefits of scale, increasing
Momentum"s policy book by 25%, without a commensurate increase in costs. The
acquisition of Sage adds a total of 590 agents to Momentum"s current agency
force and significant growth opportunities are expected to be unlocked through
this enhanced distribution network.
African Life and African Life Health
Momentum agreed to dispose of its 34% shareholding in African Life ("Aflife") to
Sanlam. This is in line with Momentum"s strategy to enter the lower and middle
end of the market through the established FNB branch network, rather than
through a traditional insurance distribution model.
Momentum has made a separate offer, which has been accepted subject to
regulatory approvals, to acquire a 100% shareholding in African Life Health
("ALH"), a medical schemes administrator, from Aflife. This acquisition provides
Momentum with access to new market segments such as local government, the
emerging market and Africa. Both of these transactions remain subject to
regulatory and competition board approvals.
Sovereign Health
Effective 1 June 2005, Momentum acquired a 100% shareholding in Sovereign Health
(Proprietary) Limited ("Sovereign"), a medical schemes administrator which was
previously a division of Medscheme, for a total cash consideration of R195
million. Sovereign administers medical schemes with a total of 106 000 principal
members. Momentum believes that this acquisition is strategically important as
it provides the critical mass required to compete effectively in this market
segment.
Advantage
Effective 12 January 2005, Momentum created significant critical mass in its
multi-management business through the acquisition of a 50% stake in Advantage
Asset Managers. The combined operations, which manage R39 billion in assets, are
well positioned to compete more effectively for new mandates.
Value for money savings products
The savings industry has undergone significant changes since the early 1990"s.
Clients demand better value for money and more flexibility, consumer bodies
demand better disclosure, regulatory pressures have increased, whilst
competitive pressures as well as the structurally lower inflation environment is
placing pressure on margins. Momentum has proactively responded to these
challenges and will continue to support changes that improve the sustainability
of the savings industry.
The values of retirement annuities, following the early cessation (or reduction)
of premium payments, are currently receiving unprecedented attention from
consumers and the press, especially following rulings of the Pension Fund
Adjudicator against life insurers and retirement funds. Momentum is acutely
aware that policy designs and charging structures of the past lend themselves to
criticism. However, Momentum believes that past practices should be judged
against what was accepted market practice at the time. It is important that the
uncertain legal framework in which life companies currently do retirement
annuity business, be clarified as soon as possible.
The commission proposals recently made by the Life Offices Association should
significantly improve early termination values of savings products, and will
simplify product design and fee structures. It is hoped that intermediaries and
regulators will endorse these future commission proposals in the interest of a
more sustainable savings industry.
Further issue of non-cumulative non-redeemable preference shares
FirstRand issued and listed on 11 August 2005, R1 530 million non-cumulative non
redeemable preference shares at an effective coupon rate of 66.7% of FNB"s Prime
Prevailing Lending Rate.
The proceeds will be applied to redeem the outstanding balance of an amount of
R1.0 billion cumulative preference shares issued in 2003, which will result in
an improvement in the quality of the capital base of FirstRand Limited. The
remaining R500 million will be used to subscribe for R500 million non-cumulative
non-redeemable preference shares in Momentum, which will improve the weighted
average cost of capital.
OVERVIEW OF RESULTS
FirstRand Limited - central cost
The costs incurred by FirstRand increased to R304 million as reflected below:
R million 30 June 2005 30 June 2004
Management (31) (50)
Taxation (184) (115)
Cumulative redeemable preference (89) (110)
shares
Total (304) (275)
The decrease in operating expenses relate to the interest received following the
raising of the non-cumulative non-redeemable preference shares.
Taxation expenses increased due to higher Secondary Tax on Companies ("STC")
paid during the year following the reduction in the dividend cover. The
reduction in the cumulative redeemable preference shares compared to the prior
year is as a result of the partial redemption of the R1 405.5 million cumulative
redeemable preference shares of which R1 080 million was still in issue at 30
June 2005, which was redeemed subsequent to the year end.
The Banking Group
The Banking Group produced excellent results for the year ended 30 June 2005,
benefiting from strong performances from RMB, FNB and WesBank.
The Banking Group achieved growth in headline earnings of 35% before adjusting
for foreign currency translation differences and 21%, after adjusting for
foreign currency translation differences.
Non-interest revenue increased by a significant 34%, benefiting from strong
growth in transactional income from FNB and WesBank and from all RMB business
units. The bad debts charge benefited from a recovery resulting from the Relyant
transaction and a continued improvement in the credit quality of the advances
book. The level of non-performing loans has improved marginally, due to the
current benign credit environment.
The lower interest rate environment reduced endowment income and, together with
the competitive landscape, continued to place pressure on interest margins. The
volume growth in the advances and the deposit books, and the Group"s interest
rate hedging strategies, provided some compensation for the decline in margins.
Operating expenditure increased by 18%. This must be viewed in the context of
costs incurred for new business growth in FNB, RMB and WesBank and an increase
in staff levels to comply with regulatory and compliance requirements as
experienced by the South African Financial Services Industry. FNB HomeLoans
maintained its policy of expensing new business acquisition costs in the year
incurred.
During the financial year the Banking Group expanded its footprint in Africa by
opening a new operation in Lesotho and investing in a private equity fund
focused on financial services on the African continent.
FNB
FNB produced strong results, growing profits by 18% to R4.1 billion.
FNB"s consumer banking activities performed particularly well, with strong asset
growth from card and mortgages. Non-interest revenue showed strong growth of
23%, largely due to growth in new clients and increased economic activity. It
was pleasing to note that price increases for bank charges were kept at a modest
3.9%. Retail deposits continued to show satisfactory growth, in line with
overall market growth.
Margin pressure continued in the low interest rate environment, however, this
was partly offset by ongoing contributions from hedging strategies.
FNB HomeLoans performed exceptionally well in terms of advances, producing new
business growth of 91%. The run-off from the acquired NBS and Saambou books
continued, albeit at a slower rate, which resulted in total advances growth of
31%. HomeLoans continued to suffer margin compression due to increased
competitor activities. In terms of IFRS, certain expensed origination costs will
be spread over the life of the homeloan which will positively impact
profitability going forward.
The FNB Card division also produced an excellent performance, with advances and
deposits increasing by 32% and 11% respectively year-on-year. Cardholder
turnover increased by 28% reflecting both an increase in the number of customers
and increased spend per customer.
FNB"s commercial segment consists of the mid-corporate, business and
agricultural sub-segments. The mid corporate sub- segment performed
exceptionally well increasing its profit before tax by 46%. The good advances
and liability growth of 23% and 25% respectively was offset by continuing margin
pressure, resulting in net interest income increasing by only 10%. Non-interest
income showed excellent growth of 28% driven by increases in transactional
volumes and the client base. It is anticipated that this segment will be a
future growth engine for FNB.
The large corporate continued to be negatively impacted by firstly, corporates
directly accessing the capital markets and secondly, by increased margin
pressure, resulting in subdued growth in advances of 8%. This resulted in net
interest income being marginally down. Non-interest income showed a marginal
increase although this should be viewed against a high base created in the
previous year by the disposal of certain retail exposures at a profit.
FNB"s operating expenses increased by 15.7% over the prior year. However, if
expenses relating to new business acquisition costs at HomeLoans and the
Discovery Card launch are excluded, the increase would be 12%.
With regard to bad debts, FNB continued to benefit from the improved credit
environment. The bad debt charge is at historical low levels of 26bps of the
advances book. If the recovery of bad debts of R134 million on the disposal of
Relyant to Ellerines is excluded the bad debts charge would increase to 37bps
(2004: 40bps).
RMB
RMB produced another set of excellent results with profits increasing to R1 901
million, 33% ahead of the prior year comparative number.
RMB"s portfolio of businesses all performed well, particularly the businesses
leveraged to and operating in the improved equity markets. The trading, asset
management and broking businesses benefited directly from greater trading
volumes and increased values.
BEE activity, comprising advisory mandates, underwriting, senior and mezzanine
debt financing and private equity, provided good deal flow to many of RMB"s
divisions especially Corporate Finance and Structured Finance. Private Equity
benefited from the realisation of two investments, despite this the unrealised
profits in the Private Equity division grew to R1.1 billion from R984 million.
The low inflation, low interest rate environment and related strong credit
markets benefited RMB"s debt origination, securitisation and structuring
activities.
WesBank
WesBank produced an excellent performance for the year ended 30 June 2005,
achieving profits of R1 404 million, an increase of 34% over the prior year.
Gross advances grew by 29% when compared to the prior year. R1.5 billion of this
growth related to the acquisition of the Barloworld Equipment Finance book.
New business production totalled R39 billion, compared to R31 billion in the
previous year, which represents an increase of 32%. Continued buoyancy in the
retail vehicle market, coupled with the existing and forecast low interest rate
environment, contributed to this high production growth.
The charge for bad debts, as a percentage of advances, was 56bps which is
similar to the equivalent period in the prior year and reflects the favourable
current economic conditions. Non-performing loans also remained consistent with
the prior year, at 63bps of advances.
Non-interest income grew 34% year-on-year reflecting the increased new business
volumes and higher penetration of WesBank"s insurance products. Non-interest
expenditure grew in line with the increased volumes, but the continued drive for
efficiencies and scale benefits improved the cost to income ratio to 46.8% (2004
48.8%).
African subsidiaries
Despite the strength of the Rand, overall the African subsidiaries increased
profit by 16.5% (17.9% in the local currencies).
FNB Namibia increased pre-tax profits by 26%, with much of this growth due to an
excellent performance from the insurance operations driven by strong growth in
in-force policies of 40% (embedded value +39%). The growth in policies is the
result of exceptional cross selling within the Group. Strong advances growth was
impacted by margin squeeze.
FNB Botswana grew profits by only 9% (22% in Pula terms). Non-interest income
grew 23% mainly due to transaction volumes which in turn were driven by new
customer accounts and increased turnover from card merchants. Advances grew by
21% as a result of a focus on good quality corporate lending.
FNB Swaziland continued to experience a depressed economy and margins remained
under pressure.
OUTsurance
OUTsurance posted strong results for the year ended 30 June 2005. Gross premium
income equalled R1.9 billion, a 30% increase compared to the previous period,
which was driven by strong organic growth in both the personal and business
lines. Headline earnings increased by 46% to R296 million.
Expenses as a percentage of net premium income decreased from 18% to 16%, which
compares to an industry average of 26%.
OUTsurance continued to reap significant benefits from collaboration, as 29% of
its premium income is generated from other businesses within the FirstRand
Group.
Momentum Group
The Momentum Group produced strong results with headline earnings increasing by
19% to R1 287 million. Overall the insurance operations increased operating
profit by 15%. The local insurance operations increased profits by 19%, driven
by strong new business inflows, the positive impact of good market growth and a
focus on expense efficiencies. The losses incurred by the international
insurance operations were due to costs incurred on the disengagement from
Ansbacher and the operational losses within the retail linked product division.
The embedded value increased by 22% for the year. The embedded value profit for
the period represents a return of 28% on opening embedded value, reflecting
strong growth in both the shareholder"s portfolio and the value of in-force
insurance business.
Total marketing and administration expenses were contained at an increase of
13%. The local insurance operations increased expenses by only 5%.
The investment income earned on shareholders" assets increased by 14% to R355
million. The main reason for this strong performance was the growth in equity
accounted earnings of African Life from R71 million to R96 million.
The headline return on equity for the year was 25%, up from 24% for the year
ended 30 June 2004.
Asset management operations
The asset management operations generated an impressive increase in net profits
of 41%. The local asset management operations produced excellent results with
profits increasing by 63%, due to positive inflows of funds and improved local
equity markets. RMB Asset Management continued to produce a sound investment
performance. Retail funds under management increased by an impressive 41%. Total
funds under management increased by 20% to R179.6 billion.
Discovery
Discovery produced a strong performance reflecting a combination of good organic
growth and increased efficiencies across all its businesses. This performance
translated into a 32% increase in headline earnings to R350 million (2004: R265
million).
Discovery Health produced a solid but moderate performance with operating
profits increasing by 8%. This follows a significant increase in acquisition
costs coupled with the termination of reinsurance profits.
Discovery Life exceeded expectations, further consolidating its leadership
position within the pure risk assurance market and increasing operating profits
by an excellent 55% to R421 million (2004: R271 million). This exceptional
performance resulted from significant new business growth.
Vitality"s decrease in profit to R38 million was largely driven by marketing and
set-up costs relating to the Discovery Credit Card.
Destiny Health"s operating losses reduced by 18% to R87 million. The maiden
profits in January and February 2005 were offset by delayed entry into new
markets, and transitional costs incurred from moving the back-office operations
from the USA to South Africa.
Discovery made an investment of R276 million in PruHealth to meet its current
capital requirements and to fund Discovery"s share of the start-up and operating
costs. The losses to date equates to R148 million.
CAPITAL MANAGEMENT
The Group actively manages its capital base with the objective to enhance
shareholder value through its capital management framework. Capital is allocated
to FirstRand Group business units on an economic risk assumed basis, founded on
Basel II principles.
The Banking Group invests its capital in interest bearing instruments to achieve
a desired interest return and risk profile. The lower interest rate environment
resulted in reduced returns, however this was partially offset by higher capital
levels and benefits derived from hedging strategies. The capital adequacy ratio
is at 11.8% (2004: 13.8%) which is within the target range of 11.5% to 12.0%.
The Banking Group is well positioned to meet the requirements of Basel II, given
the proposed implementation date of 1 January 2008.
The capital adequacy requirement (CAR) for Momentum of R2 041 million was
covered 2.2 times (2004 pro-forma: 2.0 times), which remains within the range of
the targeted cover of 1.8 to 2.2 times.
Excess capital
In March 2005, at the time of the Group"s interim results, FirstRand stated that
the Group had excess capital of approximately R4.4 billion and indicated that
this excess would be deployed to:
- fund the vendor financing portion of the Group"s BEE ownership transaction -
R2.3 billion; and
- reduce existing gearing in FirstRand and/or return to shareholders - R2.1
billion.
The BEE transaction was effective from 16 May 2005, whereby FirstRand provided
R2.3 billion vendor finance for the staff component of the transaction.
As reported above the Group issued a further R1.5 billion non-cumulative non-
redeemable preference shares on 11 August 2005.
FirstRand redeemed R1.4 billion debt in the form of cumulative preference
shares. In addition, due to the significant organic growth in asset backed
advances in the second half of the year a further R1.2 billion was required to
fund growth. The resultant excess of R500 million will be used for organic
growth and/or a share buy-in program.
Basis of presentation
FirstRand prepares its consolidated financial statements on a going concern
basis using the historical cost basis, except for certain financial assets and
liabilities where it adopts the fair-value basis of accounting.
These financial assets and liabilities include:
- financial assets held for trading;
- financial assets classified as available-for-sale;
- derivative assets and liabilities;
- financial assets and liabilities at elected fair-value; and
- short trading positions.
The consolidated financial statements conform to Statements and Interpretations
of Generally Accepted Accounting Practice in South Africa. The consolidated
financial statements have been reviewed and audited by PricewaterhouseCoopers
Inc. and their unqualified audit report is available for inspection at the
company"s registered office.
The principal accounting policies are consistent in all material respects with
those adopted in the previous period, except as noted below.
Changes in accounting policies
The South African Institute of Chartered Accountants issued an interpretation AC
501 - Accounting for Secondary Tax on Companies ("AC 501"), effective for
financial periods commencing on or after 1 January 2004. The interpretation
requires an entity to recognise a deferred tax asset to the extent that it is
probable that the entity will declare dividends against which unused STC credits
can be utilised. FirstRand adopted AC 501 retrospectively from 1 July 2004.
Audited
R million 2005 2004
The effects of the change in accounting policy are as
follows:
Balance Sheet (opening balance)
Increase in retained earnings and increase in deferred tax 103 67
asset included in other assets
Income statement
Reduction in tax and increase in earnings 16 36
Balance Sheet (closing balance)
Increase in retained earnings and increase in deferred tax 119 103
asset included in their assets
Effect on current period income
Effect of adopting AC 501 on income before tax - -
Tax 16 36
Attributable to shareholders 16 36
In terms of AC 501, the interpretation has been applied on a retrospective basis
and consequently the 2004 results have been restated.
Share-based expenses
During February 2004 the International Accounting Standards Board issued a new
accounting standard, IFRS 2, which requires the cost of share options to be
expensed. The statement is effective for financial years commencing on or after
1 January 2005.
The FirstRand Group conducted an exercise to establish the expenditure that
would have been recognised had it applied the standard in the year ended 30 June
2005. Although the transitional provisions of the standard require that only
share options granted after 7 November 2002 be expensed, the exercise included
all share options granted since 1 July 1998. The impact of which is reflected
below.
Impact on diluted headline earnings per share
30 June 2005 30 June 2004 % growth
Diluted headline earnings per 143.3 108.4 32
share
Impact of expensing share- (2.3) (0.5)
based payments
Diluted headline earnings per 141.0 107.9 31
share
Odd-lot offer
In an attempt to reduce the substantial and ongoing administration costs
associated with having a large number of small shareholders, the directors
proposed the implementation of an odd-lot offer to facilitate a reduction in the
number of small shareholders. Approximately 10% of odd-lot shareholders accepted
this offer resulting in a net reduction of 49 850 shares in issue.
Corporate governance
FirstRand has embraced the recommendations of King II on Corporate Governance
and strives to provide reports to shareholders that are timely, accurate,
consistent and informative.
The Financial Services Charter
FirstRand remains focused on meeting or exceeding its responsibilities under the
Financial Services Charter.
Prospects
In general the increased economic activity experienced in the year ended 30 June
2005 is expected to continue.
It is likely that the South African economy will remain in a structurally lower
inflationary environment for some time to come. Interest rates are expected to
remain at current levels for the next financial year. Whilst the lower interest
rate environment will continue to place the Banking Group"s margins under
pressure, it is also expected to positively impact both credit demand and
consumer spending, albeit at a slower rate than was experienced during this
financial year.
The challenge going into 2006 will be to maintain growth and efficiencies at
current levels. The Banking Group is confident that it is well positioned to
continue to achieve real growth in earnings for shareholders in the 2006
financial year.
The rising level of consumerism in the insurance industry has resulted in an
increased focus on product profit margins and the need to achieve scale benefits
through consolidation. Momentum has taken steps to address these issues firstly
by reducing the charges on its latest generation savings products, and secondly
through the acquisitions of Advantage, Sovereign, ALH and Sage. These
acquisitions should provide a positive basis for future earnings growth.
Momentum is currently embarking on a number of strategic initiatives to drive
organic growth, including a joint venture with FNB to penetrate the middle
market, and the growth of the agency force through the Sage acquisition.
Barring any unforeseen external shocks and in the context of the current strong
economic growth in South Africa, FirstRand believes the existing strategies of
the Group and the diversified income streams generated from the underlying
business units, will ensure that the Group is well positioned to achieve its
stated objective of 10% real growth.
Management changes
Since the year end FirstRand has announced certain senior management changes.
In July the Group announced that the MD of Momentum, Hillie Meyer, is leaving at
the end of September 2005. He will be replaced by EB Nieuwoudt, the CEO of the
FirstRand Africa and Emerging Markets division. Meyer, who joined Momentum in
1988 and became MDof Momentum in 1997, has decided to take a year"s break. He
has no immediate career plans. Nieuwoudt will be replaced by Theunie Lategan,
previously the CEO of FNB Corporate.
On 15 September the Group announced that Laurie Dippenaar will step down as
Group CEO and move to a non-executive role. Paul Harris, currently the Banking
Group CEO, will become Group CEO and Sizwe Nxasana, previously the CEO of Telkom
SA, will join the Group as CEO of the Banking Group. Laurie Dippenaar will
remain non-executive chairman of Momentum, Discovery and OUTsurance and serve as
a non-executive director on the Boards of FirstRand Bank and FirstRand Limited.
Laurie Dippenaar"s resignation and Paul Harris" appointment as FirstRand Limited
CEO will be effective 1 January 2006. Sizwe Nxasana"s appointment as CEO of
FirstRand Bank will be effective on the same date. Sizwe Nxasana"s appointment
as CEO of the Banking Group has been approved by the South African Reserve Bank.
For further information on these changes shareholders are referred to the
detailed announcement that was published on SENS on 15 September and can be
viewed on the FirstRand website www.firstrand.co.za.
For and on behalf of he board
GT Ferreira / Chairman LL Dippenaar / Chief Executive
Sandton 19 September 2005
DIVIDEND DECLARATIONS
Ordinary Shares
The following ordinary cash dividends were declared in respect of the 2005 and
2004 financial year.
2005Cents per share 2004 Cents per share
Interim (declaration date: 1 March 26.60 19.25
2005)
Final (declaration date: 20 28.50 26.75
September 2005)*
Total for the year 55.10 46.00
* The last day to trade in FirstRand Shares on a cum-dividend basis in respect
of the final dividend will be Friday 14 October 2005 and the first day to trade
ex-dividend will be Monday 17 October 2005. The record date will be Friday 21
October 2005 and the payment date Monday 24 October 2005. No dematerialisation
or rematerialisation of shares may be done during the period Monday 17 October
2005 and Friday 21 October 2005, both days inclusive.
Details on preference share dividends previously declared
Dividends on the `A" preference shares are calculated at a rate of 65% of the
prime lending rate of banks and the following dividends have previously been
declared for payment:
"A" Preference
R million share
Period 1 July 2004 - 31 December 2004 23
Period 1 January 2005 - 30 June 2005 13
Dividends on the `B" preference shares are calculated at a rate of 68% of the
prime lending rate of banks and the following dividends have previously been
declared for payment:
"B" Preference "B1" preference
Cents share share
Period 11 November 2004 - 28 228 -
February 2005
Period 1 March 2005 - 29 August 360 -
2005
Period 11 August 2005 - 29 - 37
August 2005
By order of the Board
A H Arnott / Company Secretary
20 September 2005
Directors GT Ferreira (Chairman), LL Dippenaar (CEO), VW Bartlett, DJA Craig
(British), DM Falck, PM Goss, NN Gwagwa, PK Harris, MW King, G Moloi, KC
Shubane, BJ van der Ross, AP Nkuna, Dr F van Zyl Slabbert, RA Williams, YI
Mahomed, SEN Sebotsa
Secretary and registered office AH Arnott, BCom, CA (SA), 4th Floor, 4 Merchant
Place, Corner of Fredman Drive and Rivonia Road, Sandton 2196
Postal address PO Box 786273, Sandton, 2146, Telephone : +27 11 282 1808,
Telefax : +27 11 282 8065, Web address : www.firstrand.co.za
Sponsor (in terms of JSE Listings Requirements), Rand Merchant Bank, (A division
of FirstRand Bank Limited), 1 Merchant Place, Corner of Fredman Drive and
Rivonia Road, Sandton 2196
Transfer Secretaries Computershare Investor Services 2004 (Pty) Limited, 70
Marshall Street, Johannesburg 2001
Postal address PO Box 61051, Marshalltown 2107, Telephone: +27 11 370 5000,
Telefax: +27 11 688 5221
Transfer Secretaries - Namibia, Transfer Secretaries (Pty) Limited, Shop No 12,
Kaiserkrone Centre, Post Street Mall, Windhoek
Postal address PO Box 2401, Windhoek, Namibia, Telephone: +264 61227647,
Telefax: +264 61248531
Income statement / for the year ended 30 June
Audited
R million 2005 2004
Banking Group
Interest income 23 417 22 412
Interest expenditure (13 920) (13 505)
Net interest income before impairment of 9 497 8 907
advances
Impairment of advances (706) (833)
Net interest income after impairment of 8 791 8 074
advances
Total non-interest income 12 001 8 970
Income from operations 20 792 17 044
Operating expenditure (12 389) (10 503)
Net income from operations 8 403 6 541
Share of earnings of associated companies 877 585
Income from continuing operations 9 280 7 126
Profit on sale of discontinuing operations 346 -
Income before taxation 9 626 7 126
Indirect taxation (409) (400)
Income before direct taxation 9 217 6 726
Direct taxation (2 115) (1 701)
Income after taxation 7 102 5 025
Earnings attributable to outside (292) (277)
shareholders
Earnings from banking operations 6 810 4 748
Momentum and Discovery
Group operating profit after tax 1 314 1 013
Revenue 11 082 11 306
Net premium income 9 591 10 026
Fees for asset management 1 491 1 280
Investment income attributable to 4 994 5 128
policyholders
Policyholder benefits (8 866) (7 498)
Operating and administration expenses (3 821) (3 291)
Commissions (1 761) (1 452)
Deferred acquisition costs 1 -
Fair-value adjustment to policyholder (7 917) (3 214)
liabilities arising from investment
contracts
Realised and unrealised investment 14 917 3 377
surpluses
Direct taxation (1 200) (661)
Indirect taxation (146) (134)
Transfer to policyholder liabilities under (5 528) (2 328)
insurance contracts
Earnings attributable to outside (441) (220)
shareholders
Investment income on the shareholders" 426 326
portfolio
Investment income on the shareholders" 393 346
portfolio
Profit on sale of available-for-sale 71 15
assets
Taxation on investment income (38) (35)
Earnings from Momentum and Discovery 1 740 1 339
Earnings from Momentum 1 358 1 065
Earnings from Discovery 382 274
FirstRand Limited (304) (275)
Management expenses (31) (50)
Capital raising expenses (89) (110)
Taxation (184) (115)
Goodwill amortised - intergroup - 5
Consolidation of share trusts (155) (105)
Earnings attributable to shareholders 8 091 5 712
Headline earnings per share (cents) 146.2 111.0
Earnings per share (cents) 154.3 110.0
Diluted earnings per share (cents) 151.2 107.4
Diluted headline earnings per share 143.3 108.4
(cents)
Headline earnings per share excluding 141.1 118.1
impact of foreign currency translations
(cents)
Diluted headline earnings per share 138.3 115.3
excluding impact of foreign currency
translations (cents)
Dividend per share (cents) 55.1 46.0
Statement of headline earnings and dividend / for the year ended 30 June
Audited
R million 2005 2004 % change
Banking Group 6 492 4 796 35
Momentum Group 1 287 1 081 19
Discovery Group 350 265 32
FirstRand Limited (304) (274) (11)
Dividend payment on non-cumulative (68) -
non-redeemable preference shares
Sub total 7 757 5 868 32
Consolidation of Share Trusts (155) (105) (48)
Headline earnings 7 602 5 763 32
Headline earnings 7 602 5 763 32
Currency translation (gains)/losses
on integrated foreign operations
- Banking Group (264) 370
Headline earnings excluding impact of 7 338 6 133 20
foreign currency translations
Return on average equity (based on 26.7 25.6
headline earnings excluding impact of
foreign currency translations)(%)
Earnings per share (cents)
- Basic 154.3 110.0 40
- Diluted 151.2 107.4 41
Headline earnings per share (cents)
- Basic 146.2 111.0 32
- Diluted 143.3 108.4 32
Headline earnings excluding impact of
foreign currency translations per
share (cents)
- Basic 141.1 118.1 19
- Diluted 138.3 115.3 20
Dividend per ordinary share (cents)
- Interim 26.60 19.25 38
- Final 28.50 26.75 7
Total 55.10 46.00 20
Dividend per non-cumulative non-
redeemable preference share (cents)
"B" preference shares
- 28 February 2005 228 -
- 29 August 2005 360 -
Total 588 -
"B1" preference shares
- 29 August 2005 37 -
Ordinary dividends declared (R 3 057 2 516 22
million)
Non-cumulative non-redeemable 182 -
preference shares dividend declared
(R million)
Number of shares in issue (before 5 613.6 5 476.4
elimination of treasury shares)
(million)
Weighted average number of shares in 5 199.9 5 192.1
issue (million)
Diluted weighted average number of 5 306.4 5 317.1
shares in issue (million)
Headline earnings reconciliation
Banking Group 6 810 4 748 43
Momentum Group 1 358 1 065 28
Discovery Group 382 274 39
Goodwill amortised - intergroup - 5 (100)
8 550 6 092 40
FirstRand Limited - holding company (304) (275) (11)
Consolidation of Share Trusts (155) (105) (48)
Attributable earnings 8 091 5 712 42
Less: Dividends paid to non- (68) -
cumulative non-redeemable preference
shareholders
Attributable earnings for ordinary 8 023 5 712 40
shareholders
Adjusted for:
Add: Goodwill - 58
Less: Profit on sale of (346) -
subsidiaries
Add: Loss on sale of assets 7 92
Less: Profit on sale of available- (82) (99)
for-sale financial instruments
Headline earnings 7 602 5 763 32
Sources of profit / for the year ended 30 June
2005 % 2004 %
R million Composition R million Composition
Banking Group 6 492 89 4 796 78
FNB 2 914 40 2 500 41
RMB 1 370 19 1 049 17
WesBank 1 007 14 759 12
FirstRand Africa 313 4 288 5
and Emerging
Markets
Group support 925 13 267 4
Ansbacher (37) (1) (67) (1)
Momentum Group 1 287 17 1 081 18
Insurance 685 9 595 10
operations
Asset management 247 3 175 3
operations
Investment income 355 5 311 5
on shareholders"
assets
Discovery Group 350 5 265 4
FirstRand Limited (304) (4) (274) (4)
Consolidation of (155) (2) (105) (2)
share trust
Headline earnings 7 670 105 5 763 94
Dividend payment on (68) (1) - -
non-cumulative non-
redeemable
preference shares
Headline earnings 7 602 104 5 763 94
for the Group
Impact of foreign (264) (4) 370 6
currency
translations
Headline earnings 7 338 100 6 133 100
excluding impact of
foreign currency
translations
Notes: 1. Taxation relating to the FirstRand Banking Group has been allocated
across the Bank"s operating divisions on a pro-rata basis.
Balance sheet / as at 30 June
Audited
R million 2005 2004
Assets
Banking Group 297 744 277 326
Cash and short-term funds 23 403 25 104
Advances 222 495 208 874
- originated 176 019 141 627
- held-to-maturity 7 449 8 971
- available-for-sale 1 648 4 499
- fair-value 37 379 53 777
Investment securities and other investments 43 047 36 131
- Financial instruments held for trading 20 728 9 660
Investment securities 22 319 26 471
- held-to-maturity 998 957
- available-for-sale 13 758 16 867
- elected fair-value 7 563 8 647
Commodities 618 702
Non-recourse investments 8 181 6 515
Momentum and Discovery 96 732 82 654
Cash and cash equivalents 13 143 15 149
Government and public authority stocks 14 735 13 123
- available-for-sale 194 627
- elected fair-value 14 541 12 496
Debentures and other loans 8 378 8 110
- available-for-sale 36 75
- elected fair-value 8 342 8 035
Equity investment 55 787 42 070
- held-to-maturity 824 749
- available-for-sale 1 367 1 665
- elected fair-value 53 596 39 656
Property investments 4 159 3 648
Policy loans 530 554
Banking Group, Momentum and Discovery 67 755 64 887
Loans and receivables 16 020 8 865
Investments in associated companies 3 768 2 815
Derivative financial instruments 39 727 45 485
- qualifying for hedging 811 4 798
- trading 38 916 40 687
Taxation 118 174
Deferred taxation 575 1 029
Assets arising from insurance contracts 2 169 1 403
Intangible assets 1 145 660
Property and equipment 4 233 4 456
Total assets 462 231 424 867
Liabilities and shareholders" equity
Liabilities 430 085 399 029
Deposits and current accounts 237 612 219 061
Non-recourse liabilities 8 181 6 515
Current liabilities 23 128 14 052
Provisions 1 569 1 345
Taxation 193 1 414
Derivative liabilities 30 264 40 783
- qualifying for hedging 249 4 606
- trading 30 015 36 177
Short trading positions 19 919 23 286
Deferred taxation 3 919 2 098
Retirement funding liabilities 1 516 1 402
Debentures and long-term liabilities 6 432 7 104
Policyholder liabilities 97 352 81 969
- under insurance contracts 48 508 42 337
- under investment contracts 48 844 39 632
Shareholders" funds 29 856 24 015
Ordinary share capital and share premium 4 396 6 767
Reserves 22 468 17 248
- Distributable reserves 20 575 15 208
- Non-distributable reserve 1 893 2 040
Non-cumulative non-redeemable preference 2 992 -
shares
Outside shareholders" interest 2 290 1 823
Total liabilities and shareholders" equity 462 231 424 867
Summarised cash flow statement / for the year ended 30 June
Cash flows from operating activities
Cash generated by operations 17 887 16 312
Working capital changes 1 837 (11 844)
Cash inflow from operations 19 724 4 468
Taxation paid (3 298) (2 482)
Dividends paid (2 835) (1 956)
Net cash inflow from operating activities 13 591 30
Cash flows from investment activities
Banking Group investment activities (10 484) 73
Momentum and Discovery investment activities (6 733) (6 275)
Net purchase of property and equipment (389) (1 265)
Investment in associates (1 175) (106)
Net purchase of intangible assets (238) (393)
Subsidiaries acquired (278) -
Proceeds on disposal of subsidiary 1 019 -
Net cash outflow from investment activities (18 278) (7 966)
Cash flows from financing activities
Repayment of long-term borrowings (693) -
Proceeds from share issue 3 000 3 101
Net cash inflow from financing activities 2 307 3 101
Net decrease in cash and cash equivalents (2 380) (4 835)
Cash and cash equivalents at the beginning of the 40 253 45 088
year
Cash and cash equivalents at the end of the year 37 873 40 253
Cash and cash equivalents sold (1 335) -
Cash and cash equivalents bought 8 -
Cash and cash equivalents at the end of the year 36 546 40 253
Assets under management / at 30 June
Holding company 114 56
Banking Group 343 830 322 001
Momentum 113 493 98 852
Discovery 4 794 3 958
Total on balance sheet assets 462 231 424 867
Off-balance sheet assets managed or administered 153 609 104 218
on behalf of clients
Total assets under management or administration 615 840 529 085
Statement of changes in equity / for the year ended 30 June
Audited
Non-redeemable non-cumulative Ordinary shares
preference shares
Total
Share pref-
capital erence
and share-
share holders" Share Share Retained
R million premium funds capital premium earnings
Balance at 1 July - - 53 7 002 11 881
2003
Change in - - - - 67
accounting policy
Restated balance - - 53 7 002 11 948
at 1 July 2003
Movement in - - - - -
revaluation
reserves
Currency - - - - -
translation
differences
Movement in other - - - - -
reserves
Earnings
attributable to
shareholders - - - - 5 817*
Realised loss on
minority
share buy-back - - - - (3)
Ordinary dividends - - - - (1 956)
Transfer (to)/from - - - - (493)
reserves
Sub total 53 7 002 15 313
Consolidation of - - (1) (287) (105)*
share trusts
Balance at 30 June 52 6 715 15 208
2004
Balance at 1 July - - 52 6 715 15 208
2004
Issue of share 3 000 3 000 1 - -
capital
Reduction of share - - - (1) -
capital
Share issue (8) (8) - (5) -
expense
Currency - - - - -
translation
differences
Movement in - - - - (1)
revaluation
reserves
Movement in other - - - - -
reserves
Earnings
attributable to
shareholders - - - - 8 246*
Ordinary dividends - - - - (2 767)
Preference - - - - (68)
dividends
Transfer (to)/from - - - - 116
reserves
Effective change
of shareholding
of subsidiary - - - - (4)
Sub total 2 992 2 992 53 6 709 20 730
Consolidation of - - (2) (2 364) (155)*
share trust
Balance at 30 June 2 992 2 992 51 4 345 20 575
2005
Ordinary shares Total
Total
Non- ordinary Total
distri- share- share-
butable holders" holders"
R million reserves funds funds
Balance at 1 July 2003 1 857 20 793 20 793
Change in accounting 67 67
policy
Restated balance at 1 1 857 20 860 20 860
July 2003
Movement in (201) (201) (201)
revaluation reserves
Currency translation (254) (254) (254)
differences
Movement in other 70 70 70
reserves
Earnings attributable
to
shareholders - 5 817 5 817
Realised loss on
minority
share buy-back - (3) (3)
Ordinary dividends - (1 956) (1 956)
Transfer (to)/from 493 - -
reserves
Sub total 1 965 24 333 24 333
Consolidation of share 75 (318) (318)
trusts
Balance at 30 June 2 040 24 015 24 015
2004
Balance at 1 July 2004 2 040 24 015 24 015
Issue of share capital - 1 3 001
Reduction of share - (1) (1)
capital
Share issue expense - (5) (13)
Currency translation (354) (354) (354)
differences
Movement in 455 454 454
revaluation reserves
Movement in other (139) (139) (139)
reserves
Earnings attributable
to
shareholders - 8 246 8 246
Ordinary dividends - (2 767) (2 767)
Preference dividends - (68) (68)
Transfer (to)/from (116) - -
reserves
Effective change of
shareholding
of subsidiary - (4) (4)
Sub total 1 886 29 378 32 370
Consolidation of share 7 (2 514) (2 514)
trust
Balance at 30 June 1 893 26 864 29 856
2005
* On the face of the income statement dividends received on treasury shares have
been offset against earnings attributable to shareholders as follows:
R million 2005 2004
Earnings attributable to shareholders per above 8 246 5 817
Consolidation of share trusts (155) (105)
Earnings attributable to shareholders per the income 8 091 5 712
statement
Date: 20/09/2005 08:00:52 AM Supplied by www.sharenet.co.za
Produced by the JSE SENS Department
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