Wrap Text
Audited consolidated results for the year ended 29 February 2016
FINBOND GROUP LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 2001/015761/06)
Share code: “FGL” ISIN: ZAE00013895
(“Finbond” or “the Company” or “the Group")
AUDITED CONSOLIDATED RESULTS FOR THE YEAR ENDED 29 FEBRUARY 2016
Executive Overview
The directors are pleased to present the financial results of the
Finbond Group for the year ended 29 February 2016.
During the year under review, Finbond delivered another set of solid
results, increasing Headline Earnings per share by 23.3%, Income from
operations by 24.6%, Operating profit from continuing operations by
29.3%, EBITDA by 24.6% and normalised earnings attributable to
shareholders by 27.1%.
These results were achieved despite an extremely difficult and
challenging external environment and significantly increased
competition in the short term unsecured lending market in South
Africa. Conservative lending practices, strict upfront credit scoring
procedures, effective collections, an increased distribution
footprint and a strong focus on client service helped us weather this
storm.
In giving effect to our strategic plan of action we made the
following progress during the period under review:
• Operating profit from continuing operations increased by 29.3%
to R94.9 million (Feb 2015: R73.4 million).
• Headline earnings per share increased by 23.3% to 10.6 cents
(Feb 2015: 8.6 cents).
• Normalised earnings attributable to shareholders of R64.7
million, growth of 27.1% over the R50.9 million in the
comparative period.
• Earnings before interest, taxation, depreciation and
amortization (EBITDA) increased by 24.6% to R195.3 million (Feb
2015: R156.7 million).
• Revenue from continuing operations increased by 23.2% to R561.2
million (Feb 2015: R455.4 million).
• Cash received from customers increased by 18.2% to R1.3 billion
(Feb 2015: R1.1 billion).
• Number of loans advanced grew by 23% to 583 265 (Feb 2015: 474
109) while the value of loans advanced increased by 15.4% to
R883.9 million (Feb 2015: R765.7 million).
• The loan to deposit ratio improved by 20.1% to 41.3% (Feb 2015:
34.4%) as loans grew while the quantum of deposits was
relatively unchanged.
• We expanded our branch network by 20.3% to 344 branches in South
Africa.
• We entered the North American short term lending market with the
acquisition of 91 Pay Day Lending Stores in the United States of
America and Canada effective 1 March 2016.
• We won the 2015 Sustainability Data Transparency Index awards
for the Integrated Annual Report, achieving the highest score in
the sector: “Financials – Other”, and the most improved score,
awarded by Integrated Reporting and Assurance Services (IRAS),
coming seventh overall.
Managing an efficient business requires stringent risk control,
compliance and corporate governance systems. During the period under
review we further expanded our Bank product capabilities, Compliance,
Internal Audit, Bank Systems and Information Technology, Human
Capital Development and Risk and Analysis Departments in order to
effectively manage Finbond Mutual Bank's Risk Management Framework.
Finbond continues to manage for the long term and to invest in
people, training, information technology, banking systems, compliance
systems as well as in enhanced collection strategies and systems, in
order to build a sustainable business that creates long term economic
value. The bulk of the increased expenses during the period under
review relates to increasing capacity and improving risk management
functions and processes within Finbond Mutual Bank.
We remain focused on executing the Group’s five-year strategy and top
business priorities, namely optimal capital utilization, earnings
growth, conservative risk management, strict upfront credit scoring,
good quality sales, effective collections, cost containment, bank
product ranges, diversifying income streams, consumer education and
training, and development of staff members. This enabled us to
achieve overall strong operational results, despite the current
difficult and challenging business environment.
Increasing profit and profitability
Finbond increased turnover to R561.2 million, an increase of 23.2%
over 2015. Finbond’s profit margin decreased slightly from 11.2% of
turnover in 2015 to 10.2% in 2016 after investing in costs that will
continue to build capacity in the business.
The majority of profit for the year was derived from Finbond’s main
economic driver small short term personal loans. Finbond’s
attributable earnings increased by 12.6%. The operating Cost to
Income ratio remained relatively unchanged this year to end the
financial year at 64.5% (Feb 2015: 64.5%).
Our return on equity is 15.6%. This is marginally better than last
year’s 15% and the year prior to that 11.6%. However, it is important
to note that Finbond Mutual Bank maintains conservative capital
adequacy and liquidity positions (i.e. a 36.5% capital adequacy ratio
which is well above the prudential limit of 25%), which negatively
skews the ratio.
Short Term Unsecured Lending Portfolio
Finbond’s focus remains on small, short-term loans. Despite
significantly increased competition in the short term loan market
over the past 12 months [that grew by 288% year-on-year as many
unsecured lenders that previously focused on longer term loans
changed their focus and now also target the short term market] we
still have a dominant 30% market share of all two and three month
loans in South Africa.
Total segment revenue from Finbond’s Short Term Micro Finance
activities, made up of interest, fee and insurance income (portfolio
yield) increased by 28.6% to R476.5 million (Feb 2015: R370.3
million).
The overall gross loan book (excluding unearned finance revenue)
reflected another year of positive growth totalling 17.2%, ending the
twelve month period at R372.2 million (Feb 2015: R317.6 million).
During the period under review, Finbond’s average loan size was
R1,515 and our average tenure was 3.8 months. Given the short-term
nature of Finbond’s products, Finbond’s loan portfolio is cash flow
generative and a good source of internally generated liquidity. The
whole loan portfolio turns more than 3 times per year.
For the year ended February 2016 Finbond received cash payments of
R1.3 billion from customers, 18.2% greater than last year, while
granting R883.9 million in new loans, an increase of 15.4% year-on-
year, (February 2015: R1.1 billion in cash received and R765.7
million in new loans granted), thereby improving the ratio of cash
received to cash granted to an average of 143% from 140% last year.
The year-on-year movement in the portfolio includes increases in
numbers of both New Clients Serviced, to 138,039 (31% more than in
the year ended February 2015: 105,304), and New Contracts Granted, to
583,265 (23% more than in the year ended February 2015: 474,109),
setting new record monthly highs for the Group in both measures
during the financial year. Growth in loans advanced was most heavily
concentrated in the mid-term products (loans of between 2 and 6
months in duration).
Finbond’s average loan period is significantly shorter than that of
our larger competitors and our average loan size, significantly
smaller. Given this conservative approach, Finbond does not have any
exposure to the 25 – 84 month, R21,000 – R180,000 long-term unsecured
lending market that continue to cause significantly increased write-
offs, bad debts and forced rescheduling of loans. Finbond’s historic
data and vintage curves indicates that shorter term loans offer lower
risk as consumers are more likely to pay them back as opposed to
longer term loans.
Furthermore, Finbond’s micro-credit portfolio is not exposed to any
concentration risk and does not have any significant exposure to any
specific employer or industry.
Strict Upfront Credit Scoring
Finbond takes a conservative view when managing credit risk which
begins at the credit granting stage.
The credit scores on all products are monitored on a monthly basis
and the dynamic performance of the portfolio is regularly taken into
account when considering potential tightening of scores. We made our
affordability criteria even more stringent during the past 12 months
which led to subdued growth in the loan portfolio. We understand that
our conservative approach led to reduced profitability but would
rather err on the side of caution in the current economic climate.
Detailed affordability calculations continue to be performed prior to
extending any loans in order to determine whether the client can in
fact afford the loan repayments. It is a testimony to the strictness
of the built-in criteria used by Finbond that no tightening of these
calculations was required when the National Credit Amendment Act
became effective on 13 March 2015 because Finbond’s existing credit
granting process already complied with the newly updated
affordability calculation requirements.
Finbond’s lending practices have been consistently conservative over
the past number of years. Rejection rates stand at between 32% and
60% for the 3 – 6 month product range, and they remain at 79% - 92%
for the 12 – 24 month product range at the end of February 2016.
Improving Bad Debts and Impairments
Conservative lending practices and strict upfront credit scoring
supported by robust collection strategies and processes were
maintained and contributed to a 5.8% improvement in arrears during
2016.
Finbond consistently applied the conservative impairment methodology
that has been used in prior financial periods, which allowed for
growth in impairment provisioning to provide even more prudently for
future losses on the portfolio. Overall impairment provisions
increased by 5.9% to R28.5 million (February 2015: R26.9 million)
compared to gross loans and advances growth of 17.2% during the year.
During the period, the Group further enhanced affordability
calculations, thereby tightening credit granting criteria to even
stricter levels than the already high levels previously set. The
result is that notwithstanding an increase in impairments, the
arrears coverage ratio has improved to 49.1% from 43.7% over the past
year.
The loan loss reserve, also referred to as risk coverage ratio
(impairment provision/Portfolio at risk: 90 days in arrears and
longer), which is an indication of a micro-finance institution’s
ability to cope with the estimated loan losses, has remained
relatively unchanged at the end of the financial year at 102.5%
(February 2015: 102.7%). The 30-day arrears coverage ratio
(impairment provision/Portfolio at Risk: 30 days in arrears and
longer), reflects an improvement in short-term arrears coverage,
being recorded at 61.3%, which increased from a ratio of 56.5% at the
end of February 2015. This improvement occurred as a combined result
of continued, consistent conservative provisioning against future
losses undertaken by management coupled with an improvement in the
level of arrears in the portfolio at year-end.
Finbond recorded an increase in impairments of 18.6% in 2016 which is
directly in line with the increase in gross loans and advances
notwithstanding the overall improvement in arrears and the quality of
the portfolio. The overall, unadjusted income statement Net
Impairment Loss Ratio remained relatively unchanged at 20.7% (Feb
2015: 20.7%), while Finbond’s significantly lower, and much more
accurate, adjusted loan loss ratios trended sideways during the year
with Net Impairment as a percentage of expected instalments amounting
to 7.1% (Feb 2015: 6.9%) and Net Impairment as a percentage of cash
received (which is more conservative than instalments due) stood at
8.6% at the end of February 2016 (Feb 2015: 8.2%). These adjusted
measures are a more appropriate reflection of the impairment cost
related to a short-term, low-value loan portfolio such as that held
by Finbond than traditional balance sheet ratios are. The best
measurement of arrears and impairments on the short-term products is
against instalments due and not outstanding balances, because a large
part of a short-term loan is repaid before month-end/year-end and is,
therefore, not reflected on the balance sheet. Thus, computations
based on the outstanding balance distort this ratio on short-term
products.
Finbond does not roll loans nor reschedule loans of clients that are
in arrears but rather writes off all loans in arrears in terms of
Finbond’s write off policy at 150 days. Loans in arrears are provided
for by 29.66% after 30 days 44.49% after 60 days and 63.03% after 120
days. Finbond does not utilise a quantitative dynamic model to
estimate impairment provisions and instead, these set percentage
rates are applied to the exposure amounts of each delinquency
status/arrears bucket in order to calculate the impairment provision.
It is our view that by rescheduling a loan in arrears you are merely
postponing the inevitable write off of a poor quality asset.
Finbond’s write off and provisioning policy has been applied
consistently over the past 8 years without any amendments or
relaxation to allow for rescheduling of loans. Finbond’s write off
policy is strictly applied and states that a client’s balances are
written off when any part of a loan is over 150 days in arrears and
no payment thereon has been received for 90 days. No exceptions are
made to this policy.
The write-off vintages show that Finbond’s 1 - 6 month product range
write-off ranges between 3% and 13%.
Collection rates averaged 86% of expected receipts for the year ended
29 February 2016 (February 2015: 83%), following an improving trend,
which ended at 86% in each month of the final quarter.
Secured Mortgage Lending
A new, secured home loan product was launched during the year which
is still in the initial stages of the product lifecycle.
Finbond granted total credit of R94.8 million in home-loan funding by
the end of the financial year, with virtually no defaults having
taken place. This conservative roll out of the new line of credit is
secured by property mortgages with a minimum of 80% loan to value.
Of the 476 applications received since the launch, 241 were declined,
giving a decline rate of just over 50% to date.
Cost Structure
Operating costs increased by 24.6% from R242.4 million in 2015 to
R302.1 million in 2016. The cost-to-income ratio remains unchanged at
64.5% in 2016.
The two biggest reasons for the growth in expenses were the
additional costs of building and running the banking platform and
increases related to the acquisition of an additional 58 branches.
Capital expenditure for the year amounted to R46.4 million (February
2015: R34.7 million).
Increased Regulation
The regulatory landscape in the financial services industry is
characterised by constant change, amendments to existing regulatory
and policy-related requirements and the introduction of new
requirements.
Finbond pro-actively engages with Regulators in a co-operative way in
order to have insight into and implement any new regulations. We have
a good, transparent and trusting relationship with our regulators
which include the Bank Supervision Department of the South African
Reserve Bank, the National Credit Regulator, The Financial Services
Board, The Johannesburg Stock Exchange and the Financial Intelligence
Centre.
The Department of Trade and Industry (“DTI”) published new
regulations dealing with the assessment of affordability under the
National Credit Act on 13 March 2015. Since publication of Amendments
in March 2015;
• the Finbond Credit Policy was aligned with the new legislation;
• the credit agreement and quotation was amended to display the
credit cost multiple and show the aggregate of fees;
• a new affordability assessment format was designed and
implemented; and
• the Form 21 (disclosure) was adjusted to more comprehensively
indicate how the commission earned by the credit provider is
calculated.
The regulations, which guide credit providers away from providing
high-risk credit and protect consumers applying for credit at
registered providers, came into effect on 13 September 2015.
The DTI published final regulations for interest rate limits and fees
for credit agreements which will become effective from 6 May 2016.
The result was an increase in initiation fees and monthly service
fees while interest rates were reduced. We performed a robust
assessment of the impact of these new regulations and determined that
there will be a very limited impact on Finbond given Finbond’s focus
on short term loans.
The DTI also invited comment on the draft regulations regarding the
capping of costs on credit life and retrenchment insurance. Finbond
currently charge actuarially determined risk based credit life and
retrenchment insurance rates. Should the proposed changes to credit
life insurance be accepted, in the currently proposed form, it will
have a material adverse impact on the insurance revenues of Finbond.
We are however confident that the loss in revenue could potentially
be replaced by refining and/or expanding the range of assistance
insurance products that Finbond offers to clients.
We continue to support appropriate regulation contributing to the
sustainability of the credit industry in South Africa if this is done
in a manner that is sustainable and achieves a balance between this
actual risk taken by financial services providers and access to
credit. Interaction between industry players and regulators are of
extreme importance in order to ensure that practical and regulatory
efficiency are considered to the benefit of all stakeholders.
On 10 June 2015, the NCR applied to the South African National
Consumer Tribunal (“Tribunal”) to, inter alia, order Finbond to:
- refund five consumers whom the NCR believes Finbond overcharged
in respect of credit life insurance;
- do an audit to determine how many other customers have been
charged more than the industry average since commencing its
credit life business, and to refund those customers; and
- pay an administrative fine of R1 million.
The NCR alleges that Finbond Mutual Bank customers, when taking out a
short-term unsecured loan, are required to pay unreasonable premiums
for the provision of credit life insurance, in contravention of
Section 106 (2) of the National Credit Act (“NCA”) and that the
commission charged for this insurance is not properly disclosed.
Finbond takes its obligations under the NCA seriously and respects
the authority of the NCR. Finbond is however confident that it at all
times complied with all relevant laws and regulations and that the
NCR application does not have legal merit and will be dismissed. The
insurance premium rates of the Credit Life Insurance Products that
Finbond Mutual Bank sells to consumers are actuarially determined,
risk based, product specific, value adding, fully justified and not
unreasonable nor at an unreasonable cost to the consumer and Finbond
will demonstrate this to the Tribunal.
Finbond has investigated the allegations and has taken legal advice,
and Senior Counsel believes the matter will be satisfactorily
resolved in Finbond’s favour through due legal process.
Low Risk Liquidity Structure
The gross loan to deposit ratio grew to 41% from 34% reflecting the
growth in lending combined with the moderation of deposits taken.
The growth in the surplus funding was curbed during the financial
year in an effort to reduce interest expense of excess surplus cash.
Finbond’s liquidity position at the end of February 2016 reflects
R106 million cash in bank (Feb 2015: R197.5 million). Overall cash,
cash equivalents and liquid investments declined by 40.7% to R338.2
million (Feb 2015: R570.2 million), as Finbond reduced the level of
surplus funding while continuing to practice extreme conservatism in
in the granting of credit.
Cash Received (including capital repaid, fees and interest) as a
percentage of Cash Granted for the period from March 2015 to February
2016, averaged 143% (February 2015: 140%), reflecting an improved
overall collections performance for the financial year over that of
the comparative period, further improving cash generation for the
Group.
The deposit book totalled R907.7 million, 1.5% down from R921.9
million last year, with an average interest rate of 9.6% (up from
9.4% last year), an average term of 28.3 months (up from 26.6 months
last year) and an average deposit size of R351,982 (up from R338,184
last year). The increase in term and deposit size speaks favourably
of the customer experience that Finbond has delivered to deposit
clientele since launching the product, as more and more depositors
are choosing to lengthen the terms of their deposits, reinvesting for
longer upon maturity, and trusting Finbond based on the positive
results experienced with their initial deposit transactions.
Finbond is not exposed to the uncertainty that accompanies the use of
corporate call deposits as a funding mechanism since Finbond accepts
mainly 6 – 72 month fixed and indefinite term deposits. Given the
long term nature of Finbond’s liabilities (fixed term deposits with
average term of 28 months) and short term nature of its assets (short
term micro loans with an average term less than 4 months), Finbond
possesses an unusually low risk liquidity structure as a result of
this positive liquidity mismatch.
Finbond Mutual Bank is funded through 2,477 individual fixed long-
term deposits, resulting in a smooth debt maturity profile with no
(0%) dependence on large funders or the debt capital markets and no
concentration risk.
The Group publicly announced a Rights Issue immediately prior to the
conclusion of the 2016 year-end and successfully raised an additional
R525 million in March 2016. This funding will be utilised to
diversify the Group’s risk while it expands it short term unsecured
lending operations to North America in accordance with the strategy
approved by the Board of Directors. The support for the strategy
demonstrated by shareholders, adds to the strong capital position,
surplus cash, robust liquidity and funding profile, and together with
management’s conservative approach to risk management, positions the
business well in order to successfully execute the Group’s strategy
to achieve sustainable growth.
Healthy Capital Position
Finbond follows a conservative approach to capital management and
holds a level of capital which supports its business, while also
growing its capital base ahead of business requirements.
Finbond’s Capital position remains strong. Finbond Mutual Bank
remains well in excess of its minimum regulatory capital
requirements, with an excess of R135.1 million over and above the
R297.4 million required by the Registrar of Banks and an excess of
R312.2 million over and above the normal DI 400 required minimum for
mutual banks.
Although Finbond as a mutual bank is not subject to the Basel III
requirements, Finbond already complies with and significantly exceeds
all Basel III requirements set for 2018 and 2019.
As at 29 February 2016, Finbond’s:
- liquidity coverage ratio % was 271% [171% more than required
from 2019]
- net stable funding ratio % was 664% [564% more than required
from 2018]
- capital adequacy ratio % was 36.5% [26.5% more than required
from 2018].
Rise in Effective Tax Rate
The effective tax rate of the Group was negatively impacted in 2016
by the increase in the capital gains tax inclusion rate to 80% of
normal tax rates from 1 March 2016.
This resulted in an increase in deferred taxation raised on
unrealised gains on the valuation of investment properties to the
value of R7.4 million and increased the effective tax rate to 40% for
the year (2015: 31%), which has been excluded from both headline and
normalised earnings per share.
Normalised earnings does not include this adjustment and accordingly
reflects as R64.7 million, growth of 27.1% over the R50.9 million in
the comparative period.
Serious Investment in Distribution and People
During the past financial year Finbond increased its branch network
by 58 branches to 344 branches in South-Africa of which 107 are
located in Gauteng, Limpopo and Mpumalanga, 61 in Kwazulu Natal, 68
in the Western Cape, 51 in the Eastern Cape and 57 in the Free State
and North West. As part of our client-centric focus we ensured that
our distribution channels reflect the demographics of our clients.
We also expanded our capacity at existing branches by increasing the
number of consultant work stations. Across the group we created an
additional 224 jobs. We are creating an action and results-oriented,
customer-focused culture. Face-to-face communication and excellent
customer service are an integral part of our business model. We want
to be more like a retailer than a bank. We invest heavily in our
people: on average our branch employees attended 6.5 training courses
during the year. This is expensive and disruptive because our
branches are spread throughout the country, but it is necessary to
enable our people to move from micro lending to banking. We spent
R3.8 million on training, 4% of our salary bill.
The cost of running Finbond Mutual Bank increased significantly
during the past financial year. Current expenditure increased by
24.6% to R302.1 million. Little of this was unexpected, as it is
expensive to implement what we are doing. Strategically, we support
the cost of building a mass market retail bank on the back of our
short term micro loans business in South Africa. The running cost of
a bank branch is approximately 20% higher than the cost of running
the same outlet as a micro lending branch. In the coming year costs
will again rise as gaining bank customers will require additional
expenditure on marketing.
Growth in Transactional Banking Customers
We continued the evolution to change Finbond Mutual Bank from short
term micro lender into a mass-market retail bank in South Africa.
During the year we achieved the strategic objectives of:
• Rolling out Finbond Mutual Bank transactional bank accounts and
savings accounts;
• Rolling out a Cellular Phone Banking Product and Application;
• Rolling out an Internet Banking Product and Application;
• Rolling out the Finbond MasterCard Debit Card product; and
• Rolling out the Finbond Home Loan product;
Our transactional banking customers grew from a zero base to 51 303
during the year
Our savings accounts have the lowest cost in the industry with a
monthly fee of only R4.00 and pay the highest interest rates in South
Africa. An ATM withdrawal costs only R4.00, and we pay up to 6%
interest on savings accounts with a maximum balance of R20 000. Our
debit card, is a full MasterCard, giving our customers access to all
Saswitch ATMs and can be used for purchases at all linked shops. At
Finbond Mutual Bank a debit order costs between R3.42 and R4.00.
We have few products, but those we have are the simplest, best and
most affordable of their kind in South Africa.
To be a serious player in the market for basic banking, we aim for
one million customers. We still have a long way to go but remain on
track to build something unique: a low-cost, full-service mass market
bank in South Africa that remains focused on the lower end of the
market.
North American Expansion
After year end Finbond embarked on an earnings enhancing growth
strategy of establishing a business presence in the North American
pay day lending (short-term lending) market through acquisitions and
subsequent organic growth of a number of pay day lenders in North
America that specialize in the advancement of short-term credit.
The initial phase of this strategy were through the acquisition of 4
North American pay day lending businesses in the United States of
America and Canada that gives Finbond a branch network of 91 branches
in North America and Canada of which 85 will be in the United States
of America (“USA”) and 6 in Canada.
Following these acquisitions approximately 40% - 50% of Finbond’s Net
Earnings will be denominated in US$ within 12 months of the effective
date and the intention is to grow US$ earnings to approximately 70% -
80% of net earnings in 3 to 5 years.
The rationale for the North American acquisitions inter alia
includes:
• Earnings enhancing growth;
• Significant growth and consolidation opportunity in the North
American pay day lending industry;
• An-organic growth in Finbond’s core “30-day” or “pay day
lending” competency;
• Attractive, unsophisticated “lending practices” in first-world
market;
• Diversification of Country and Political Risk;
• Effective ZAR hedge. Approximately 40% - 50% of earnings will be
in hard currency 12 months after the North American
acquisitions;
• Economies of scale;
• Teaming up with existing owners/managers with 10 - 30 years’
experience in operating pay day lending businesses in North
America; and
• Unique opportunity to enter the $ 46 Billion a year USA pay day
lending market.
There are various similarities between South African micro credit
industry and the US pay day lending industry.
Over the past 10 years Finbond learned some valuable lessons in the
hostile and difficult South African unsecured lending environment
with regards to effective credit risk management, liquidity risk
management and adapting to a changing market and regulatory
conditions. We survived and remained profitable in South Africa while
many of our larger peers did not. We believe we will be able to apply
this experience profitably in the North American pay day lending
market in the years ahead.
Strategic Initiatives
Strategic initiatives under way include:
• Growing market share through the increased sale of short- and
medium-term products, specifically the 30 days, 90 days and 6
months;
• Further refining, developing and improving all bank information
technology systems and process;
• Converting Finbond’s Mutual Banking license to a Commercial
Banking license;
• Expansion of the South African branch network by 40 branches in
high growth areas;
• Bedding down the 91 pay day lending branches that we acquired in
North America; and
• Selective strategic acquisitions in the South African and North
American short term lending markets.
Investment Grade Credit Rating
During the 2016 financial year, Finbond was again awarded an
Investment Grade rating by ratings agency Global Credit Ratings
(“GCR”). GCR upgraded Finbond’s BB+(ZA) National Scale Long Term
Corporate Credit Rating with a Stable Outlook to BBB-(ZA), with the
outlook accorded as Stable on 30 October 2015. GCR also affirmed
Finbond’s Short Term Credit Rating of A3 with a Stable Outlook and
Finbond’s Long Term International Scale Corporate Credit Rating of BB
with a Stable Outlook on the same date.
According to GCR, the ratings are based on the following key factors:
- “The ratings of Finbond Group Limited (“Finbond”, “the group”)
reflect its growing reputation as a leading mutual bank and
short-term credit provider in South Africa. Finbond offers short
and medium-term unsecured loans, insurance and savings products,
and (since F15) transactional banking and mortgage finance
products, through its 344 branches;
- Adequate capital, conservative credit/risk management, and
improving profitability and earnings diversification (despite
regulatory risk) support the ratings, which exclude the prospect
of systemic support, given its low likelihood. The rating
outlooks consider Finbond’s prospects/strategic direction,
within the context of challenging and uncertain economic and
regulatory environments;
- High liquidity levels (42.3% of assets at FYE15) and adequate
capitalisation (Finbond Mutual Bank’s capital adequacy ratio
(“CAR”) was 35.1% at FYE15) support the group’s moderate credit
appetite. The loan/deposit ratio was maintained at c.31% at
FYE15;
- Asset quality metrics broadly improved, despite the negative
market trends. As c.90% of loans issued are short-term,
traditional asset quality measures may overstate bad debt
experience. Gross/net impairment ratios (impairments being
defined as instalments in arrears) improved to 19.1%/11.5% at 1H
F16 (FYE14: 21.2%/14.1%). However, net impairments vs.
instalments due (management’s key asset quality measure) rose
from 6.3% (FYE14) to 7.3% (1H F16). Over the same period,
collection rates remained strong, and loan rejection rates as
well as arrears levels/roll-rates were stable. Provisioning
appeared adequate, but close monitoring is required given the
challenging operating conditions; and
- In F15, operating income rose by 59.2% to R375.9m (net income –
37.9% to R50.9m). Despite 47.5% cost growth in F15 (driven by
the group’s investment in infrastructure and internal controls)
the cost/income ratio declined to 64.5% (F14: 69.6%). Of
concern, impairment costs grew 141.4% in F15 and by 2.0x in 1H
F16.”
The ratings upgrade was achieved in an environment which has been
characterised by ratings downgrades of other banks and financial
service institutions.
Looking Ahead
The challenging and difficult macro-economic environment as well as
the adverse market conditions in the markets within which Finbond
operates are not expected to abate in the short and medium term.
However, we remain confident that we have the required resources and
depth in management to successfully confront and overcome these
various challenges.
We remain positive about our prospects for the future due to
Finbond’s: Improvement achieved in earnings and profitability despite
difficult market conditions, Improvement achieved in cash generated
from operating activities, Management expertise; Strong Cash Flow;
Strong Liquidity and surplus cash position; Uniquely positioned 344
Branch Network in South Africa and 91 Branches in North America;
Superior Asset Quality; Access to funding; Conservative Risk
Management and Growth potential in the Micro Finance and Banking
markets in the lower end of the market. We believe that the evolution
from a short term micro finance institution to a Bank South Africa
and our expansion into the North American short term lending market
in the implementation of our strategic action plan will ensure that
we achieve results in the medium and long term.
We plan for a continued rise in revenue – fee income on our banking
products will start contributing for the first time – and we are
expecting the first year of inclusion of the North American
acquisitions to result in healthy earnings growth for the Group. Our
business is in a development and growth phase and, as with all
growing businesses, real risks remain.
References to future financial performance included anywhere in this
announcement have not been reviewed or reported on by the Group’s
external auditors.
Appointments to the Board
In accordance with the requirements of paragraph 3.59 of the JSE
Limited Listings Requirements, shareholders were advised of the
appointment to the board, on 18 January 2016, of Mr Carel van
Heerden.
Mr van Heerden currently serves as the group’s Chief Operating
Officer and has done so since 2013. He started his career at Finbond
as an Area Manager in 2008 and has grown with the group over the past
eight years. Mr van Heerden holds an MBA from the University of
Stellenbosch Business School and a Bcom degree with specialization in
Risk Management from the University of South Africa.
In accordance with the requirements of paragraph 3.59 of the JSE
Limited Listings Requirements, shareholders are further advised of
the appointment to the board, with immediate effect, of Mr. Herman G.
Kotze in the capacity of non-executive director.
Mr. Kotze has been the Chief Financial Officer, secretary and
treasurer of Net1 UEPS Technologies, Inc since 2004. From January
2000 until June 2004, he served on the board of Aplitec as Group
Financial Director.
Mr. Kotzé joined Aplitec in November 1998 as a strategic financial
analyst. Prior to joining Aplitec, Mr. Kotzé was a business analyst
at the Industrial Development Corporation of South Africa. Mr. Kotzé
is a qualified South African chartered accountant, following
completion of his articles at KPMG.
Mr. Kotzé holds the following qualifications:
- B.Com (Accounting) (cum laude)
- B.Com (Accounting) (Honours) and Certificate in the Theory of
Accountancy
- H. Dip Tax (cum laude)
- Certificate in Treasury Management (cum laude).
Dividend
Notice is hereby given that a gross ordinary dividend of 3.4 cents
per share (2015: 3.4 cents) has been declared out of income reserves
on 20 April 2016 in respect of the financial year ended 29 February
2016 and is payable to ordinary shareholders in accordance with the
timetable below.
In terms of dividend tax effective since 1 April 2012, the following
additional information is disclosed:
• The local dividend tax rate is 15%;
• 762,210,879 shares are in issue of which the Group holds
14,044,127;
• The net ordinary dividend is 2.89 cents per share for ordinary
shareholders who are not exempt from dividends tax; and
• Finbond Group Limited’s tax reference number is 9194313145.
Timetable:
Declaration date Wednesday, 20 April 2016
Last day to trade cum dividend Friday, 13 May 2016
Shares commence trading ex-dividend Monday, 16 May 2016
Record date Friday, 20 May 2016
Dividend payment date Monday, 23 May 2016
No dematerialization or rematerialization of shares will be allowed
for the period from Monday 16 May 2016 to Friday 20 May 2016, both
dates inclusive.
Dividends are declared in the currency of the Republic of South
Africa. The directors have confirmed that the company will satisfy
the liquidity and solvency requirements immediately after the payment
of the dividend.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as at
29 February %
Rand Thousand 2016 28 February 2015 Growth
Assets
Cash and cash
equivalents 136,035 197,500 (31%)
Other financial assets 231,878 372,772 (38%)
Unsecured Loans and
other advances to
customers 343,749 290,715 18%
Secured Loans and other
advances to customers 94,781 - 100%
Trade and Other
receivables 133,435 57,553 132%
Inventories 1,764 2,565 (31%)
Current tax receivable 684 2,532 (73%)
Property, plant and
equipment 62,089 46,044 35%
Investment property 269,540 248,820 8%
Goodwill 152,976 120,034 27%
Intangible Assets 171 171 0%
Deferred tax 4,323 10,545 (59%)
Total Assets 1,431,425 1,349,251 6%
Equity
Equity attributable to
equity holders of parent
Share capital & premium 203,365 201,523 1%
Reserves 6,476 3,428 89%
Retained income 178,972 141,777 26%
Equity attributable to
owners of the Company 388,813 346,728 12%
Non-controlling interest (824) (824) 0%
Total Equity 387,989 345,904 12%
Liabilities
Bank Overdraft 29,628 - 100%
Trade and other payables 33,001 26,298 25%
Fixed and Notice
deposits 907,705 921,933 (2%)
Transactional deposits 3,189 69 4522%
Current tax payable 4,770 2 238400%
Finance lease obligation 1,644 1,532 7%
Loans from shareholders 18,000 15,000 20%
Deferred tax 45,499 38,513 18%
Total Liabilities 1,043,436 1,003,347 4%
Total Equity and
Liabilities 1,431,425 1,349,251 6%
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the period ended
Rand Thousand 29 February 2016 28 February 2015
Interest income 161,435 145,457 11%
Interest expense (87,525) (76,137) (15%)
Net interest income 73,910 69,320 7%
Fee income 208,025 170,128 22%
Management fee income 48,987 27,766 76%
Other micro-finance
income 139,732 79,686 75%
Operating (loss)/profit
from Cell Captive
arrangement (464) 30,612 (102%)
Fair value adjustments 3,032 1,791 69%
Net commission expense (4,903) (3,384) (45%)
Net impairment charge on
loans and advances (71,314) (60,137) (19%)
Operating expenses (302,090) (242,419) (25%)
Profit before taxation 94,915 73,363 29%
Taxation (37,661) (22,496) (67%)
Total profit and
comprehensive income for
the year 57,254 50,867 13%
Profit attributable to:
Owners of the parent 57,254 50,867 13%
Non-controlling interest
- Continuing operations - - -
Basic earnings/ (loss)
per share (cents) 9.7 8.6 13%
Earnings per share:
Basic earnings per
share (cents) 9.7 8.6 13%
Headline earnings per
share (cents) 10.6 8.6 23%
Normalised earnings
per share (cents) 11.0 8.6 28%
Diluted earnings per
share (cents) 9.7 8.6 13%
Total number of
ordinary shares
outstanding 590,981 589,614 0%
Weighted average
number of ordinary
shares outstanding 588,071 593,308 0%
Net profit
attributable to
ordinary equity
holders of the parent 57,254 50,867 13%
Adjusted for:
(Loss)/ profit on
disposal of property,
plant and equipment 615 89 (591%)
Fair value adjustment
of investment
properties (2,883) (3,256) (11%)
Tax effect on change
in capital inclusion
rate* 7,398 - 100%
Gains/(losses) on the
loss of control of a
subsidiary - 3,481 (100%)
Headline earnings 62,384 51,181 22%
*Normalised earnings 64,652 50,867 27%
CONSOLIDATED STATEMENT OF CASH FLOW
for the period ended
%
Rand Thousand 29 February 2016 28 February 2015 Growth
Cash flows from
operating activities
Cash generated from
operations (109,167) 161,166 (168%)
Tax paid (17,838) (8,543) (109%)
Net cash from
operating activities (127,005) 152,623 (183%)
Cash flows from
investing activities
Purchase of
property, plant and
equipment (28,682) (31,947) 10%
Sale of property,
plant and equipment - 1,741 (100%)
Purchase of
investment property (17,005) (2,198) (674%)
Purchase of other
intangible assets (32,943) (57,608) 43%
Purchase of
financial assets (186,211) (589,187) 68%
Sale of financial
assets 316,582 660,977 (52%)
Cash outflow from
common control
transaction - - -
Net cash from
investing activities 51,741 (18,222) 383%
Cash flows from
financing activities
Reduction of shares
capital of buy back
of shares 1,842 (24,819) 107%
Proceeds from
shareholders’ loans 3,000 15,000 (80%)
Finance lease
payments (612) (1,136) 46%
Dividends paid (20,059) (12,706) 58%
Net cash from
financing activities (15,829) (23,661) 33%
Total cash movement
for the period (91,093) 110,740 (182%)
Cash at the
beginning of the
period 197,500 86,760 128%
Total cash at the
end of the period 106,407 197,500 (46%)
CONDENSED CONSOLIDATED STATEMENT OF CHANGE IN EQUITY
For the period ended
Rand Thousand 29 February 28 February
2016 2015
Total equity at the beginning of the period 345,904 329,603
Change in share capital and premium
Re-issue/(Purchase)of treasury shares 1,842 (24,430)
Change in reserves
Equity-settled share-based payment 3,048 2,409
Total comprehensive income for the period 57,254 50,867
Dividends paid (20,059) (12,545)
Transfer between reserves - -
Change in non-controlling interest
Total comprehensive income for the period - -
Dividends paid - -
Movement in non-controlling interest in
reserves - -
Total equity at the end of the period 387,989 345,904
SEGMENTAL REPORTING
Investment Lending Property Transactional Other Total
Rand Thousand Products Investment Banking
29 February
2016
Interest
income 20,127 138,201 - 517 2,590 161,435
Interest
expense (49,360) (10,597) - (590) (26,978) (87,525)
Net Interest
Income (29,233) 127,604 - (73) (24,388) 73,910
Fee income - 199,030 - 8,995 - 208,025
Management fee
income - - - - 48,987 48,987
Other micro-
finance income - 139,732 - - - 139,732
Operating loss
from Cell
Captive
arrangement - (464) - - - (464)
Fair value
adjustment (683) - 3,715 - - 3,032
Net commission
income - (4,903) - - - (4,903)
Net impairment
charge on
loans and
advances - (72,080) - - 766 (71,314)
Operating
expense (2,352) (264,148) (1,920) (8,946) (24,724) (302,090)
Profit/(Loss)
before
taxation (32,268) 124,771 1,795 (24) 641 94,915
Taxation 10,288 (39,782) (7,971) 8 (204) (37,661)
(Loss)/profit
for the period (21,980) 84,989 (6,176) (16) 437 57,254
(Loss)/profit
for the period
attributed to:
Owner of
company (21,980) 84,989 (6,176) (16) 437 57,254
Non-
controlling
interest - - - - - -
Significant
segment assets
Cash and cash
equivalents 61,132 47,259 - 2,782 (4,766) 106,407
Other
Financial 231,521 357 - - - 231,878
Assets
Loans and
advances - 438,530 - - - 438,530
Inventories
- - - 1,764 - 1,764
Property,
Plant and
Equipment 4 49,210 - 1,034 11,841 62,089
Investment
Property - - 269,540 - - 269,540
Goodwill - 152,976 - - - 152,976
Significant
segment
liabilities
Deposits
received from
customers 907,705 - - - - 907,705
Transactional
deposits - - - 3,189 - 3,189
Loans from
shareholders - - - - 18,000 18,000
SEGMENTAL REPORTING
Investment Lending Property Transactional Other Total
Rand Thousand Products Investment Banking
28 February
2015
Interest
income 23,577 119,768 28 - 2,084 145,457
Interest
expense (37,700) (16,049) - (128) (22,260) (76,137)
Net Interest
Income (14,123) 103,719 28 (128) (20,176) 69,320
Fee income (2) 169,835 290 9 (4) 170,128
Management fee
income - - - - 27,766 27,766
Other micro-
finance income 515 50,105 - - 29,066 79,686
Operating
profit from
cell captive
arrangement - 30,612 - - - 30,612
Fair Value
adjustment (2,212) - 4,003 - - 1,791
Net commission
expense - (3,384) - - - (3,384)
Net impairment
charge on
loans and
advances - (57,959) (923) - (1,255) (60,137)
Operating
expense (1,654) (225,112) (927) (2,076) (12,650) (242,419)
Profit/(Loss)
before (17,476) 67,816 2,470 (2,195) 22,749 73,363
taxation
Taxation - 71 171 - (22,738) (22,496)
(Loss)/profit
for the period (17,476) 67,887 2,641 (2,195) 11 50,867
(Loss)/profit
for the period
attributed to:
Owner of
company (17,476) 67,887 2,641 (2,195) 11 50,867
Non-
controlling
interest - - - - - -
Significant
segment assets
Cash and cash
equivalents 154,926 42,536 38 - - 197,500
Other
Financial
Assets 369,720 3,052 - - - 372,772
Loans and
advances - 290,715 - - - 290,715
Inventories - - - 2,565 - 2,565
Property,
Plant and
Equipment 10 38,267 - 1,597 6,170 46,044
Investment
Property - - 248,820 - - 248,820
Goodwill - 120,034 - - - 120,034
Significant
segment
liabilities
Deposits
received from
customers 921,933 - - - - 921,933
Transactional
deposits - - - 69 - 69
Loans from
shareholders - - - - 15,000 15,000
Notes to the condensed consolidated financial statements
Finbond Group Limited is a company domiciled in South Africa. The
condensed consolidated annual financial statements as at and for the
year ended 29 February 2016 comprise the Company and its subsidiaries
(together referred to as the “Group”) and the Group’s interests in
associates and jointly controlled entities.
These condensed consolidated annual financial statements have been
prepared in accordance with the SAICA Financial Reporting Guides, as
issued by the Accounting Practices Committee and the Financial
Pronouncements, as issued by the Financial Reporting Standards
Council, IAS 34 Interim Financial Reporting, the Companies Act and
the JSE Listings Requirements. They do not include all of the
information required for full annual financial statements, and should
be read in conjunction with the consolidated, audited annual
financial statements of the Group as at and for the year ended 29
February 2016.
These results have been prepared under the supervision of Mr GT
Sayers, (CA)(SA).
These condensed consolidated financial statements were approved by
the Board of Directors on 19 April 2016.
Significant accounting policies
The accounting policies applied by the Group in these condensed
consolidated annual financial statements are consistent with those
accounting policies applied in the preparation of the previous
consolidated annual financial statements.
Estimates
The preparation of annual financial statements requires management to
make judgements, estimates and assumptions that affect the
application of accounting policies and the reported amounts of assets
and liabilities, income and expenses.
In preparing these condensed consolidated annual financial
statements, the significant judgements made by Management in applying
the Group’s accounting policies and the key sources of estimation
uncertainty were the same as those that applied to the consolidated,
audited annual financial statements as at and for the year ended 28
February 2015.
Post balance sheet event
Subsequent to the current financial period Finbond Group acquired a
number of branches in South Africa, USA and Canada as going concerns
through business combinations.
The Group publicly announced a Rights Issue immediately prior to the
conclusion of the 2016 year-end and successfully raised an additional
R525 million from the transaction in March 2016.
Fair value disclosures
Fair value hierarchy of instruments measured at fair value
The table below analyses assets and liabilities carried at fair
value, by level of fair value hierarchy. The different levels are
based on the extent that quoted prices are used in the calculation of
the fair value of the instruments and have been defined as follows:
Level 1: Fair value is based on quoted unadjusted prices in active
markets for identical assets or liabilities that the group can access
at measurement date.
Level 2: Fair value is determined through valuation techniques based
on observable inputs, either directly, such as quoted prices, or
indirectly, such as derived from quoted prices. This category
includes instruments valued using quoted market prices in active
markets for similar instruments, quoted prices for identical or
similar instruments in markets that are considered less than active
or other valuation techniques where all significant inputs are
directly observable from market data.
Level 3: Fair value is determined through valuation techniques using
significant unobservable inputs. This category includes all assets
and liabilities where the valuation technique includes inputs not
based on observable data, and the unobservable inputs, have a
significant effect on the instrument’s valuation. This category
includes instruments that are valued based on quoted prices for
similar instruments where significant unobservable adjustments or
assumptions are required, to reflect differences between the
instruments.
Levels of fair value
measurements
Rand Thousand Level 1 Level 2 Level 3 Total
Assets and liabilities
measured at fair value:
Recurring
Other financial assets - 231,521 358 231,879
Investment property - - 269,540 269,540
- 231,521 269,898 501,419
Valuation techniques used to derive level 2 and 3 fair values
Level 2 fair values of other financial assets have been derived by
using the rate as available in active markets. The underlying assets
and liabilities of the investment in the Cell Captive arrangement are
mainly cash and cash equivalents, gross debtors and SARS liabilities.
These all approximate fair value and the fair value hierarchy is
considered level 1 and level 2, with no elevated risk areas. The
IBNR provision is managed from industry data accumulated on the
Alexander Forbes Risk and Insurance Services claim system, and is
classified as a Level 3. Refer to the accounting policy on insurance
claims provisions for further details of the calculations performed.
Level 3 fair values of investment properties have been generally
derived using the market value, the comparable sales method of
valuation, and the residual land valuation method, as applicable to
each property.
The fair value is determined by external, independent property
valuers, having appropriate, recognised professional qualifications
and recent experience in the location and category of the properties
being valued. The valuation company provides the fair value of the
Group’s investment portfolio every twelve months.
Reconciliation of assets and liabilities measured at level 3
Rand Thousand
Gains/losses
recognized Subsequent
Opening in profit or capitalised Closing
Group 2016 Balance loss Purchases expenditure balance
Investment Property
Investment properties 248,820 3,715 17,005 - 269,540
Transfer of assets and liabilities within levels of the fair value hierarchy
No transfers of assets and liabilities within levels of fair value hierarchy
occurred during the current financial year. There were no transfers in 2016.
Cash and cash equivalents are not fair valued and the carrying amount
is presumed to equal fair value.
Short-term receivables and short-term payables are measured at
amortised cost and approximate fair value, due to the short-term
nature of these instruments. These instruments are not included in
the fair value hierarchy.
Independent auditor's opinion
These condensed consolidated financial statements for the year ended
29 February 2016 are based on the audited consolidated annual financial
statements. KPMG Inc expressed an unmodified opinion on the consolidated
annual financial statements.
A copy of the auditor's report on the consolidated financial statements
is available for inspection at the company's registered office, together
with the consolidated financial statements identified in the respective
auditor's reports.
For and on behalf of the Board
Dr Malesela Motlatla Dr Willie van Aardt
20 April 2016
--------------------------------------------------------------------
Directors
Chairman: Dr MDC Motlatla* (BA, DCom (Unisa)); Chief Executive
Officer: Dr W van Aardt (BProc (Cum Laude), LLM (UP), LLD (PU CHE)
Admitted Attorney of The High Court of South Africa, QLTT (England
and Wales), Solicitor of the Supreme Court of England and Wales);
HJ Wilken-Jonker* (BComHons (Unisa); Chief Financial Officer:
GT Sayers (CA (SA), BCom (Hons) (UNP), BCompt (Hons) (Unisa));
Adv J Noeth* (B Iuris LLB); Adv. N Melville* (B Law, LLB(Natal)
LLM(Cum Laude)(Natal)SEP(Harvard); RN Xaba* (CA)(SA) BCompt, BCompt
(Hons) (Unisa);R Emslie* (B Com (Law), Hons (Acc),
(CA)(SA)); DJ Brits* (B Com, MBA) (NW); Chief Operating Officer: C
van Heerden (MBA).
Secretary: Ben Bredenkamp (B Com Accounting LLB UP)
*Non-executive
Transfer secretaries
Link Market Services South Africa (Proprietary) Limited
(Registration number 2000/007239/07)
11 Diagonal Street, Johannesburg, 2001
(PO Box 4844, Johannesburg, 2000)
Sponsor: Grindrod Bank Limited
Date: 20/04/2016 10:00:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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