Wrap Text
Consolidated results for the year ended 28 February 2019
FINBOND GROUP LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 2001/015761/06)
Share code: “FGL” ISIN: ZAE000138095
(“Finbond” or “the Company” or “the Group")
CONSOLIDATED RESULTS FOR THE YEAR ENDED 28 FEBRUARY 2019
During the 12 months under review, Finbond delivered lackluster results, with
Interest revenue increasing by 17.4% to R1.81 billion; Revenue from continuing
operations increasing by 8.2% to R2.58 billion, Income from operations
increasing by 1.4% to R2.25 billion and EBITDA decreasing by 39.7%.
These substandard results were the consequence of a once off abnormal fair value
adjustment and the transition of SASSA customers to the new Post-Office card
and are not reflective of the Group’s efforts, initiatives or good overall
business performance.
Our materially increased US$ revenue from our operations in the United States
of America and Canada, strong cash flows and substantial cash and cash
equivalent reserves helped us to weather the storm in South Africa.
During the period under review:
• Total Assets increased by 8.8% to R3.42 billion (Feb 2018*: R3.15
billion).
• Net Assets increased by 58.3% to R1.65 billion (Feb 2018*: R1.04 billion).
• Cash and Cash Equivalents increased by 19.8% to R765.520 million (Feb
2018: R639.195 million)
• Revenue from continuing operations increased by 8.2% to R2.58 billion
(Feb 2018: R2.38 billion).
• US $ contribution to Revenue and Headline Earnings increased to 64.2% and
84.1% respectively.
• Earnings before interest, taxation, depreciation and amortisation
(EBITDA) decreased by 39.7% to R420.8 million (Feb 2018*: R697.8 million).
• Number of loans advanced contracted by 9.6% to 1,700,255 (Feb 2018:
1,880,108).
• Value of loans advanced decreased by 3.8% to R5.21 billion (Feb 2018:
R5.42 billion).
• Cash received from customers remained stable at R7.18 billion (Feb 2018:
R7.19 billion).
• We expanded our overall branch network by 3.3% to 694 branches (Feb 2018:
672), of which 435 branches are in South Africa (Feb 2018: 415) and 259
are the United States of America (Feb 2018: 257).
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 the Group.
We remain focused on executing the Group’s strategy and top business priorities
namely, optimal capital utilization, earnings growth, strict upfront credit
scoring, good quality sales, effective collections, cost containment and
training and development of staff members.
ABNORMAL ONCE-OFF FAIR VALUE ADJUSTMENTS and SASSA
Finbond’s Performance for the period under review was adversely affected by
external events and skewed by anomalous once-off fair value adjustments:
A. An abnormal downward fair value adjustment of R129.6 million relating to
Finbond’s Property Development Assets in Mpumalanga and Gauteng.
B. The transition of SASSA customers to the South African Post Office card
as set out in more detail hereinafter.
A.) FAIR VALUE ADJUSTMENT OF INVESTMENT PROPERTIES
As part of the Boards annual valuation process Finbond obtained 4 Independent
External Valuers (duly registered with the South African Institute of Valuers)
to independently value Finbond’s Zwartkoppies Property. This highly specialized
property consists of the following value forming attributes:
- Mineable Land,
- Development rights for the development of a 6 star boutique hotel, golf
estate, polo estate, fly fishing estate and a dairy estate (RoD
development rights),
- Agricultural Land,
- Standing Timber.
Valuers valued the Farm Zwartkoppies as follows:
• R173 million (RoD Development Rights Only) – Mr. V.P. Mnguni (Professional
Associated Valuer (South Africa)) of APG Valuations.
• R270 million (RoD Development Rights, Minable Land, Agricultural Land and
Standing Timber)- Mr. F.P. Grobbelaar (NDip (Prop Val) MIV(SA)) of
Gojemaso Enterprises.
• R240 million (RoD Development Rights, Minable Land, Agricultural Land and
Standing Timber) – Mr. H.N. Hartman (NDip (Prop Val) MIV(SA)) of Hartman
Professional Enterprises.
• R70 million (RoD Development Rights only). - Mr. D. Jendrzejewshi
(Professional Valuer) of Alfa Valuations.
Given the economic headwinds in the South African Property Sector, policy
uncertainty around land expropriation and low probability of successful
development or sale in the current market resulted in the Finbond Board adopting
a conservative position of R70 million for the Zwartkoppies property that lead
to an abnormal downward fair value adjustment of R129.6 million relating to
Finbond’s Property Development Assets in Mpumalanga, as well as Gauteng.
B.) SOUTH AFRICAN SOCIAL SECURITY AGENCY (SASSA) SWITCH TO THE SOUTH AFRICAN
POST OFFICE (SAPO)
A large portion of Finbond’s South African SASSA client base transitioned to
the new “SAPO” card resulting in a more than 68% reduction in our SASSA customer
base. This card was launched by SAPO and SASSA on 3 May 2018, but did not avail
the functionality to load EFT debits or stop orders, which limited our ability
to effectively collect amounts due and payable from this segment of the market.
Consequently asset quality deteriorated with first strike collection rates in
South Africa significantly decreasing by 9% from 90% to 81% at the end of
September 2018 and average monthly write offs increasing from approximately R16
million to R30 million between August 2018 and February 2019.
We took John Maxwell’s advice that “The pessimist complains about the wind. The
optimist expects it to change. The leader adjusts the sails” and took swift
action by significantly increasing credit granting criteria and only lending to
SASSA customers if they have active Finbond Mutual Bank accounts.
First strike collection rates has since stabilised at 87% at the end of April
2019 and the average monthly write off has recovered to a normal range of
between R15 million and R18 million per month as at the end of April 2019.
PROFIT AND PROFITABILITY
Despite these adverse developments in South Africa, Finbond achieved a turnover
of R2.58 billion, an increase of 8.2% over 2018. Interest revenue increased by
17.4% from R1.54 billion to R1.81 billion.
The majority of profit for the year was derived from unsecured personal loans.
The operating Cost to Income ratio increased to end the financial year at 62.7%
(Feb 2018: 59.6%).
84.1% or R115.8 million of Headline earnings was generated in North America
while 15.9% of Headline Earnings or R21.9 million was generated in South Africa.
* Results for the 2018 financial year have been restated. Please see additional
information in the consolidated financial statements and notes thereto.
CONTINUED FOCUS ON SHORT TERM LOANS
Total segment revenue from Finbond’s micro finance activities in both South
Africa and North America, made up of interest, fee and insurance income
(portfolio yield) increased by 8.4% to R2.55 billion (Feb 2018: R2.35 billion).
Despite continued strong competition in the short term loan market over the
past 12 months our share of the 1 to 6 month short term unsecured market [loans
below R8,000 with a tenure of between 30 days and 180 days] remains above 25%.
During the period under review, Finbond’s average loan size in South Africa was
R1,668 with an average tenure of 3.9 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. For the twelve months ended February
2019 Finbond granted R1.43 billion worth of loans and received cash payments of
R2.31 billion from customers in South Africa. The whole loan portfolio turns
over 3 times a year.
Finbond’s average loan period is substantially shorter than 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
market. Finbond’s historic data and vintage curves indicate that shorter term
loans offer lower risk as consumers are more likely to pay them back as opposed
to longer term loans.
As at February 2019, 66% of sales were 0 to 1 month loans. The focus remains on
high quality, small, short-term loans. This is supported with an average loan
term of 3.9 months in South Africa and 6 months in North America and an average
loan size across all loan type sales in North America being $348 and R1,656 in
South Africa.
One of the key value drivers is the quality of new business. Without quality,
new business growth is meaningless and not sustainable. An impressive average
overall collection experience for the year of 97% and a minimum average
individual business line collection experience of 84% reaffirms that high
quality loans are added to the portfolio and furthermore that no individual
business line is dragging on performance.
CONSERVATIVE UPFRONT CREDIT SCORING PRACTICES
Detailed affordability calculations are performed prior to extending any loans
in order to determine whether clients can in fact afford the loan repayments.
In line with our conservative approach, additional expense buffers were again
included in all affordability assessments.
Finbond continued to apply strict upfront credit scoring and affordability
criteria. The credit scores on the various products are monitored on a monthly
basis and are continually adjusted to reduce credit risk and further improve
the quality of assets held.
Finbond’s lending practices have been consistently conservative over the past
number of years and our rejection or decline rates remain higher than that of
our major competitors. Rejection rates in South Africa stood at between 76% and
91% for our 12-24 month product at the end February 2019.
High and stable Capital Weighted Scores (“CWS”) in our South African loan book
data support the notion that Finbond is extending loans to clients of higher
credit quality.
The capital distribution of new loans compared to historic loans shows a shift
in distribution when considering the exposure that each approved application
presents. Finbond is granting larger loans to clients with higher credit scores
or alternatively smaller loans to clients with lower credit scores. This is a
crucial element of Finbond’s credit risk management methodology that is designed
to increase/decrease the size of the risk (loan) as the probability of default
decreases/increases.
GROWTH IN TRANSACTIONAL BANKING CUSTOMERS
We continued the evolution to turn Finbond Mutual Bank into a retail bank in
South Africa. Although this is taking longer than expected we continue to move
forward.
The cost of running Finbond Mutual Bank increased further during the past
financial year. Current expenditure increased by 11.9% to R339.5 million. Little
of this was unexpected, as it is expensive to implement what we’re doing.
Strategically, we support the cost of building a mass market retail bank on the
back of our short term loans business in South Africa.
Our transactional banking customers grew from 82 606 to 224 127 during the year.
Our savings accounts have some of the lowest cost and pay the highest interest
rates in South Africa. An ATM withdrawal costs only R10.00, and we pay 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 only R2.50. We have few products, but those we have are the simplest,
best and most affordable of their kind in South Africa.
During 2019 we will be launching our Afrikaans focused online 24/7 bank offering
“Finbond Platinum”. 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 retail bank in South
Africa with offerings to both the mass market and Afrikaans market through
Finbond Mutual Bank and Finbond Platinum respectively.
As we build our retail market bank in South Africa, costs will continue to rise.
We remain conservative in spending money and cautious in ensuring that the bank
always has enough of it.
RELATIVE TO THE SIZE OF OUR BUSINESS WE HAVE SIGNIFICANT CASH RESERVES
Finbond’s net cash, cash equivalents and liquid investments increased by 19.8%
to R765.520 million (Feb 2018: R 639.195 million).
Our business generates substantial positive cash-flow. We collected R 7.18
billion cash from customers over the past year.
Cash Received as a percentage of Cash Granted for the period under review
improved by 5% to an average of 138% (Feb 2018: 133%).
By the end of February 2019 the deposit and commercial paper portfolio in South
Africa amounted to R1.43 billion [Feb 2018: R1.31 billion]. The average deposit
size is R387,439, the average term 23.9 months and the average interest rate is
9.91%. The average commercial paper investment is R1 million the average term
5 years and the average interest rate 11%. Finbond is not exposed to the
uncertainty that accompanies the use of corporate call deposits as a funding
mechanism since Finbond only accepts 6 to 72 month fixed and indefinite term
deposits and 60 months commercial paper investments.
Given the long term nature of Finbond’s liabilities [fixed term deposits with
an average term of 23.9 months and commercial paper with an average term of 60
months] and the short term nature of its assets (short term micro loans with an
average term of 3.9 months in South Africa), Finbond possesses a low risk
liquidity structure.
FINBOND MUTUAL BANK 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.
Due to the once off abnormal fair value write downs to the Investment Property
Portfolio, as a result of a year-end adjustment, retroactively after year end,
Finbond Mutual Bank’s minimum regulatory capital requirement as at 28 February
2019 reflected a shortfall of R40.3 million to the R202.3 million (25% of Risk
Weighted Assets) required by the Prudential Authority, and an excess of R81.0
million over and above the required qualifying regulatory capital per Basel
III. Although Finbond as a Mutual Bank is not subject to the Basel III
requirements, Finbond already complies with, and exceeds, all Basel III
requirements. As at 28 February 2019, Finbond’s:
• internally calculated liquidity coverage ratio was 290% (190% more than
required);
• internally calculated net stable funding ratio was 805% (705% more than
required); and
• capital adequacy ratio was 20.01% (10.01% more than required under Basel
III), but 4.99% below the minimum prudential limit required by the
Prudential Authority.
In order to immediately address and rectify the reduction in capital caused by
the once off abnormal fair value adjustment to Investment Properties, Finbond
Group Limited recapitalized Finbond Mutual Bank, in the amount of R 40 million,
at the end of May 2019. Following the recapitalization, Finbond Mutual Bank’s
required qualifying regulatory capital (based on 30 April 2019 DI returns),
reflected an excess of R28.3 million to the R194.0 million (25% of Risk Weighted
Assets) required by the Prudential Authority, and an excess of R144.7 million
over and above the required qualifying regulatory capital per Basel III.
Following the May 2019 recapitalization (and based on 30 April 2019 DI returns),
Finbond’s:
• internally calculated liquidity coverage ratio was 168% (68% more than
required);
• internally calculated net stable funding ratio was 647% (547% more than
required); and
• capital adequacy ratio was 28.64% (18.64% more than required in terms of
Basel III), and 3.64% above the minimum prudential limit required by the
Prudential Authority.
INVESTMENT GRADE CREDIT RATING AFFIRMATION
In December 2018, Global Credit Ratings affirmed the Investment Grade long term
national scale rating of Finbond Group Limited of BBB(ZA) and the short term
national scale rating of A3(ZA); with the outlook accorded as Stable.
Furthermore, Global Credit Ratings affirmed the long-term international scale
local currency rating assigned to Finbond Group Limited of B+; with the outlook
accorded as Stable.
FINBOND RATED SECOND BEST BANK IN SOUTH AFRICA AND ELEVENTH BEST BANK IN THE
WORLD
In October 2018, the London based Lafferty Group awarded Finbond with a 4-star
quality award as a high quality bank in the Lafferty Banking 500 global
benchmarking study.
Finbond is one of some 174 banks among 500 of the largest banks worldwide to
achieve 4 or 5-star ratings. Two-thirds of the banks are rated 3-star or lower.
The highest-quality banks are given 4 and 5-star ratings, while the lowest are
rated as a 1-star or a 2-star.
Finbond is the second highest ranked bank in South Africa and has been named as
one of the leading banks globally, ranking 11th in the world.
Institutions from 72 markets across all global regions are included in the
survey, ranging from large global banks to small regional institutions. Lafferty
Banking 500 is not one report but a vast database of 500 banks with 19 individual
metrics for each of them. Lafferty’s approach reveals a very different picture
of world banking from that given by traditional ratings and rankings. It goes
far beyond financial comparisons. Lafferty’s proprietary methodology, which is
entirely based on bank annual reports, takes account of multiple qualitative
metrics such as strategy, culture, living the brand, digital advancement,
management experience and customer satisfaction – as well as more traditional
financial criteria such as capital, loan/deposit ratios and return on assets.
SERIOUS INVESTMENT IN DISTRIBUTION AND PEOPLE
During the past financial year Finbond increased its overall branch network by
a further 22 branches to 694 branches [March 2018: 672]
In South Africa Finbond increased its branch network by 20 branches to 435
branches in South-Africa of which 167 are located in Gauteng, North West,
Limpopo and Mpumalanga, 67 in KwaZulu-Natal, 76 in the Western Cape, 60 in the
Eastern Cape and 65 in the Free State and Northern Cape.
In the United States of America and Canada Finbond increased its branch network
from 257 branches to 259 branches of which 29 are located in California, 53 are
located in Louisiana, 61 are located in Illinois, 5 are located in Indiana, 2
are located in Florida, 1 is located in Utah, 15 are located in Missouri, 13
are located in Ontario (Canada), 5 are located in Michigan, 13 are located in
Mississippi, 12 are located in Alabama, 9 are located in Wisconsin, 22 are
located in Tennessee, 9 are located in Oklahoma, 8 are located in South Carolina,
1 is located in New Mexico and 1 is located in Nevada.
Finbond also has an online offering that offers instalment loans in the states
of Illinois, Wisconsin, Missouri, New Mexico, Utah and Nevada via the
Creditbox.com website.
Approximately 84% of Finbond’s headline earnings are currently denominated in
US$. The significantly higher percentage for the current year relates to the
South African SASSA transition issue described earlier. The intention is to
grow US$ earnings from a normalized 65% to approximately 80% of net headline
earnings in 3 to 5 years.
Finbond North American sales are well diversified across the various states
with limited exposure to concentration risk.
REGULATION AND COMPLIANCE
Finbond Group and Finbond Mutual Bank have a good, transparent and trusting
relationship with its regulators which include the Prudential Authority, the
National Credit Regulator, the Financial Sector Conduct Authority, the
Johannesburg Stock Exchange and the Financial Intelligence Centre.
The increasingly more-stringent regulatory environment impacting the financial
services sector constantly challenges banks to comply with regulatory
requirements.
Finbond’s compliance universe consists of all the statutory and regulatory
requirements of all relevant legislation, regulation codes applicable to the
business activities of the Group and the Bank.
During the period under review the Compliance function focused on the following
key areas:
• the identification of new regulatory requirements; employee awareness
relating to regulatory requirements; and combating unethical behaviour;
• improved compliance risk monitoring;
• compliance training in all areas;
• continued high levels of compliance with the National Credit Act;
• continued high levels of compliance with the FAIS and FICA Acts.
Compliance risk is managed through internal policies and processes which include
legal, regulatory and business-specific requirements. Regular training and
advice is provided to ensure that all employees are familiar with their
compliance obligations.
The Finbond Mutual Bank Contact with Regulators Policy provides a framework
that guides ad hoc contact with any financial services regulatory authority
relevant to the Group and the Bank, ensuring that communication with regulators
is handled promptly and professionally. In terms of the policy the Compliance
division is responsible for providing guidance to business before and during
meetings with regulators, for maintaining a log of all commitments made to
regulators and for monitoring the progress of commitments.
UNINTENDED CONSEQUENCES OF THE PROPOSED SOUTH AFRICAN DEBT RELIEF BILL
Over-indebtedness is a serious economic and social challenge in South Africa.
The Banking Association South Africa (BASA) supports debt intervention to assist
low-income consumers whose circumstances have changed for the worse, through no
fault of their own, and when formal debt-counselling processes provide
inadequate relief.
However, the National Credit Amendment Bill, which has been provided to the
president to sign into law, is not a sustainable debt-intervention measure and
threatens the ability of banks to extend credit to low-income consumers –
hindering efforts to offer inclusive financial services to all South Africans.
This is a result of the bill failing to balance the rights of consumers and
credit providers and limiting the ability of banks to safeguard the savings and
salaries entrusted to them by South Africans. Specifically: The National
Consumer Tribunal and the courts are to be granted the power to make debt
restructuring orders – which reduces the interest rate, fees and charges for
credit agreements in debt intervention and debt review processes – to zero for
a period of five years or longer. This effectively legislates for the granting
of concessions to all consumers seeking debt intervention or who can enter the
debt review process.
It also means that secured credit agreements, such as mortgages, could be
restructured to an interest rate of 0%, which is unsustainable for banks and
consumers who hope to earn interest on their savings.
The unintended consequences of this provision is that access to credit for homes
and movable assets, like vehicles – which can be sources of income and wealth
creation – will become more difficult and the cost of credit is likely to
increase. Banks have a fiduciary duty to protect the deposits of their savers
and investors, which are used to extend credit.
The scope of application of the proposed legislation is too broad. Those
qualifying for debt intervention must have an average monthly gross income of
under R7 500 and total outstanding unsecured debt of R50 000. Their debt can be
extinguished after a period of up to 24 months, during which the levying of
interest, fees and charges and the obligation to make payment towards the debt,
will be suspended.
The powers given to the Minister to review and increase the income and unsecured
debt thresholds are deemed to be an unlawful delegation of legislative power.
They do not provide stakeholders with an opportunity to publicly participate in
the process, making it procedurally unfair.
This creates uncertainty for credit providers who will not be able to accurately
assess the risk of loans not being repaid. The consequences of the proposed
broadened scope of the Bill for consumers, the economy and sectors such as
banking, retail and micro-lending, have not been subjected to an in-depth social
and economic impact assessment and engagement with relevant stakeholders.
BASA has urged the portfolio committee to act in the interests of all South
Africans by addressing the unintended consequences of the Bill and helping to
ensure that the credit market can continue to provide financial services to
those in need, in a sustainable and fair manner.
LOOKING AHEAD
Although 60% of our revenue is generated in US$, South Africa still contributes
a significant portion of total revenue. The challenging and difficult South
African macro-economic environment as well as the adverse market conditions in
the South African market 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 efficaciously overcome these challenges and remain optimistic
about our prospects for the future due to Finbond’s: management expertise;
strong cash flow; strong liquidity and surplus cash position; uniquely
positioned 435 branch network in South Africa and 259 branches in North America;
superior asset quality; access to funding and conservative risk management
practices in South Africa and North America.
We believe that the evolution from a short term micro finance institution to a
retail bank in South Africa and our continued expansion into the North American
short term lending market in the implementation of our strategic action plan
will ensure that we achieve good results in the medium and long term.
Our business is in a development and growth phase and, as with all growing
businesses, real risks remain.
DIVIDEND
The board has approved the declaration of a gross dividend from retained
earnings of 1.55 cents per share (“Cash Dividend”). Shareholders will, however,
be entitled to elect to receive a capitalisation share issue alternative (“the
Capitalisation Issue Alternative”). If no election is made, the Cash Dividend
will be paid.
The declaration data announcement will be released on SENS and the circular
relating to the Cash Dividend and Capitalisation Issue Alternative will be
distributed to shareholders in due course.
The Cash Dividend will be payable in the currency of South Africa. The Cash
Dividend is subject to a local dividend tax rate of 20%, resulting in a net
Cash Dividend of 1.24 cents per share, unless the relevant shareholder is exempt
from dividend tax or is entitled to a reduced rate in terms of the applicable
double tax agreement. The company's income tax reference number is 9194313145.
At the date of this announcement the company has 944,907,501 ordinary shares in
issue.
If approved, the Capitalisation Issue Alternative will not be subject to
dividend tax. However, there are possible tax implications of electing to
receive shares under the Capitalisation Issue Alternative and shareholders are
advised to obtain their own professional advice in this regard.
AUDITED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as at
28 28 February 1 March
February 2018* 2017*
2019 (Restated) Change (Restated)
R'000
Assets
Cash and cash equivalents 532,429 422,339 26% 547,351
Other financial assets 233,091 216,856 7% 207,717
Unsecured loans and other
advances to customers 804,533 741,664 8% 619,017
Trade and other receivables 131,246 158,177 (17%) 139,850
Other assets 19,288 12,632 53% 760
Derivative financial
instrument 4,920 - - -
Secured loans and other
advances to customers 208,903 210,977 (1%) 220,958
Property, plant and
equipment 195,184 131,816 48% 113,800
Investment property 137,200 266,771 (49%) 278,185
Deferred taxation 50,720 14,215 257% 20,115
Goodwill 987,872 862,609 15% 782,301
Intangible assets 116,838 108,035 8% 115,064
Total assets 3,422,224 3,146,091 9% 3,045,118
Equity
Capital and reserves
Share capital 1,150,684 724,525 59% 715,667
Reserves 5,530 (193,715) (103%) (72,350)
Retained income 332,144 383,860 (13%) 205,529
Share capital and reserves
attributable to ordinary
shareholders 1,488,358 914,670 63% 848,846
Non-controlling interest 163,747 128,689 27% 194,807
Total equity 1,652,105 1,043,359 58% 1,043,653
Liabilities
Bank overdraft 90,620 91,033 0% 27,725
Trade and other payables 121,744 124,029 (2%) 81,428
Other liabilities 10,668 11,757 (9%) 10,105
Current tax payable 22,235 42,073 (47%) 40,456
Derivative financial
instrument - 47,430 - -
Loans from shareholders 84,970 470,586 (82%) 508,440
Purchase consideration
payable - - - 213,375
Fixed and notice deposits 998,604 1,027,114 (3%) 1,098,609
Deferred taxation 5,782 9,882 (41%) 21,327
Commercial paper 435,496 278,828 56% -
Total liabilities 1,770,119 2,102,732 (16%) 2,001,465
Total equity and liabilities 3,422,224 3,146,091 9% 3,045,118
AUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended
28 February
28 February 2018*
2019 (Restated) Change
R'000
Interest income 1,809,953 1,541,716 17%
Interest expense (193,876) (208,231) (7%)
Net interest income 1,616,077 1,333,485 21%
Fee income 466,407 458,540 2%
Management fee income 467 66,971 (99%)
Other operating income 301,470 315,783 (5%)
Fair value adjustments (74,513) (6,872) 984%
Foreign exchange gain/(loss) (57,902) 52,318 (211%)
Net impairment charge on loans and
advances (593,694) (500,416) 19%
Operating expenses (1,495,503) (1,296,444) 15%
Profit before taxation 162,809 423,365 (62%)
Taxation (9,821) (102,164) (90%)
Profit after taxation 152,988 321,201 (52%)
Other comprehensive income to be
reclassified to profit or loss
Foreign currency translation
difference for foreign operations 260,318 (136,174) (291%)
Total comprehensive income for the
year 413,306 185,027 123%
Profit attributable to:
Owners of the company 36,909 227,441 (84%)
Non-controlling interest 116,079 93,760 24%
Profit for the period 152,988 321,901 (52%)
Total comprehensive income
attributable to:
Owners of the company 230,367 112,930 104%
Non-controlling interest 182,939 72,097 154%
Total comprehensive income 413,306 185,027 123%
Earnings per share
Earnings per share (cents)
Basic 4.1 30.4 (86%)
Diluted 4.1 29.1 (86%)
Headline earnings per share (cents)
Basic 15.4 32.8 (53%)
Diluted 15.4 31.0 (50%)
Total number of ordinary shares
outstanding 923,727 748,547 23%
Weighted average number of ordinary
shares outstanding 895,886 748,570 20%
Effect on conversion of shareholders
loans into equity 54,435 204,131 (73%)
Weighted average number of ordinary
shares (diluted) at 28 February 950,321 952,701 (0%)
Profit attributable to owners of the
Company 36,909 227,441 (84%)
Adjusted for:
Interest on shareholders loans 14,374 49,284 (71%)
Fair value adjustment on foreign
exchange derivative (7,085) 34,150 (121%)
Foreign exchange gain on loans from
shareholders 7,085 (34,044) (121%)
Diluted earnings 51,283 276,831 (81%)
Net profit attributable to ordinary
equity holders of the parent 36,909 227,441 (84%)
Adjusted for:
Loss on disposal of property, plant
and equipment 226 1,755 (87%)
Fair value changes of investment
properties 100,575 16,639 504%
Headline earnings 137,710 245,835 (44%)
Adjusted for:
Interest on shareholders loans 14,374 49,284 (71%)
Fair value adjustment on foreign
exchange derivative (7,085) 34,150 (121%)
Foreign exchange gain on loans from
shareholders 7,085 (34,044) (121%)
Diluted headline earnings 152,084 295,225 (48%)
AUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended
28 February
28 February 2018*
2019 (Restated) Change
R'000
Cash flows from operating activities
Cash generated from operations 341,850 71,004 381%
Taxation paid (67,085) (105,872) (37%)
Net cash from operating activities 274,765 (34,868) (888%)
Cash flows from investing activities
Purchase of property, plant and
equipment (89,559) (57,050) 57%
Capital expenditure of investment
property (36) (10,029) (100%)
Purchase of other intangible assets (12,903) - -
Purchase of financial assets (13,469) (20,238) (33%)
Sale of financial assets - 52,863 -
Acquisition of subsidiaries net of cash
acquired - (213,498) -
Net cash from investing activities (115,967) (247,952) (53%)
Cash flows from financing activities
Buy back of shares - (43,478) -
Issue of share capital 32,708 - -
Repayment of shareholders loan (69,730) (5,565) 1,153%
Proceeds from commercial paper 156,668 278,828 (44%)
Finance lease payments (2,867) (2,525) 14%
Dividends paid (197,012) (101,945) 93%
Net cash from financing activities (80,233) 125,315 (164%)
Total cash movement for the year 78,565 (157,505) (150%)
Cash at the beginning of the year 331,306 519,626 (36%)
Effect of movements in exchange rates on
cash held 31,938 (30,815) (204%)
Total cash at end of the year 441,809 331,306 33%
AUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended
28
February 28 February 2018*
2019 (Restated)
R'000
Total equity at the beginning of the year
as previously presented 1,043,359 1,161,917
Correction of error - (118,264)
Total restated equity as at the beginning
of the year 1,043,359 1,043,653
Change in accounting policy – IFRS 9 (3,818) -
Restated total equity as at 1 March 1,039,541 1,043,653
Change in share capital
Issue of shares 426,159 54,049
Buy-back of shares - (45,191)
Change in reserves
Total comprehensive income for the year 230,367 112,930
Equity settled share based payment 5,787 (6,854)
Change in control 15,191 -
Dividends paid (93,640) (154,281)
Change in non-controlling interest
Total comprehensive income for the year 182,939 72,097
Change in control (15,191) (8,992)
Business combination - (24,052)
Dividends paid (139,048) -
Total equity at the end of the year 1,652,105 1,043,359
AUDITED CONSOLIDATED SEGMENTAL INFORMATION
OPERATING SEGMENTS
R'000
Investment Property Transactional
28 February Investment
2019 Products Lending Banking Other Total
Interest
income 21,751 1,784,341 - - 3,861 1,809,953
Interest
expense (139,713) (34,603) - (437) (19,123) (193,876)
Net interest
income (117,962) 1,749,738 - (437) (15,262) 1,616,077
Fee income - 450,521 - 15,883 3 466,407
Management
fee income - - - - 467 467
Other
operating
income 185 294,711 - - 6,574 301,470
Fair Value
adjustments - 2,744 (129,607) - 52,350 (74,513)
Foreign
exchange gain - - - - (57,902) (57,902)
Net
impairment
charge on
loans and
advances - (585,260) - (310) (8,124) (593,694)
Operating
expenses (3,726) (1,363,771) (2,251) (26,901) (98,854) (1,495,503)
Profit/(loss)
before
taxation (121,503) 548,683 (131,858) (11,765) (120,748) 162,809
Taxation 15,252 (58,259) 16,552 1,477 15,157 (9,821)
Profit/(loss)
after
taxation (106,251) 490,424 (115,306) (10,288) (105,591) 152,988
Significant
segment
assets
Cash and cash
equivalents 192,027 298,068 - 8,949 33,385 532,429
Other
financial
assets 233,091 - - - - 233,091
Unsecured
Loans and
other
advances to
customers - 804,533 - - - 804,533
Secured Loans
and other
advances to
customers - 208,903 - - - 208,903
Trade and
other
receivables - 66,985 - - 64,261 131,246
Property,
plant and
equipment - 177,094 - 751 17,339 195,184
Investment
property - 137,200 - - 137,200
Goodwill - 987,872 - - - 987,872
Intangible
assets - 116,838 - - - 116,838
Significant
segment
liabilities
Fixed and
notice
deposits 998,604 - - - 998,604
Commercial
Paper 435,496 - - - 435,496
Loans from
shareholders - - - - 84,970 84,970
28 February Investment Property Transac
2018* Investment tional
(Restated) Products Lending Banking Other Total
Interest
income 19,560 1,516,473 - 1,517 4,166 1,541,716
Interest
expense (107,205) (76,013) - (167) (24,846) (208,231)
Net interest
income (87,645) 1,440,460 - 1,350 (20,680) 1,333,485
Fee income - 455,171 - 3,369 - 458,540
Management
fee income - - - - 66,971 66,971
Other
operating
income 52 264,928 - 603 50,200 315,783
Fair value
adjustment - 62,086 (21,443) - (47,515) (6,872)
Foreign
exchange gain 52,318 52,318
Net
impairment
charge on
loans and
advances - (490,905) - 27 (9,538) (500,416)
Operating
expenses (2,271) (1,230,178) (1,999) (2,306) (59,690) (1,296,444)
Profit/(loss)
before
taxation (89,864) 501,562 (23,442) 3,043 32,066 423,365
Taxation 32,668 (130,591) 8,522 (1,106) (11,656) (102,163)
Profit/(loss)
after
taxation (57,196) 370,971 (14,920) 1,937 20,410 321,202
Significant
segment
assets
Cash and cash
equivalents 153,096 231,733 - 6,937 30,573 422,339
Other
financial
assets 216,709 147 - - - 216,856
Unsecured
Loans and
other
advances to
customers - 741,664 - - - 741,664
Secured Loans
and other
advances to
customers - 210,977 - - - 210,977
Trade and
other
receivables - 97,922 - - 60,255 158,177
Property,
plant and
equipment - 111,264 - 2,441 18,111 131,816
Investment
property - 266,771 - - 266,771
Goodwill - 862,609 - - - 862,609
Intangible
assets - 108,035 - - - 108,035
Significant
segment
liabilities
Fixed and
notice 1,027,11
deposits 4 - - - 1,027,114
Commercial
Paper 278,828 - - - 278,828
Loans from
shareholders - - - - 470,586 470,586
GEOGRAPHICAL SEGMENTS
28 February 2019
R'000 South Africa North America Total
Interest Income 236,105 1,573,848 1,809,953
Interest expense (160,539) (33,337) (193,876)
Net interest income 75,566 1,540,511 1,616,077
Fee income 403,761 62,646 466,407
Management fee income 376 91 467
Other operating income 282,957 18,513 301,470
Fair value adjustment (75,029) 516 (74,513)
Foreign exchange (57,443) (459) (57,902)
gain/(loss)
Net Impairment charge on (227,274) (366,420) (593,694)
loans and advances
Operating expenses (493,030) (1,002,473) (1,495,503)
Profit before taxation (90,116) 252,925 162,809
Taxation 11,313 (21,134) (9,821)
Profit for the year (78,803) 231,791 152,988
Significant segment assets
Cash and cash equivalents 280,489 251,940 532,429
Other financial assets 233,091 - 233,091
Unsecured loans and other 267,269 537,264 804,533
advances to customers
Secured loans and other 181,633 27,270 208,903
advances to customers
Trade and other receivables 86,476 44,770 131,246
Property, plant and 64,375 130,809 195,184
equipment
Investment property 137,200 - 137,200
Goodwill 196,787 791,085 987,872
Intangible assets 171 116,667 116,838
Significant segment
liabilities
Fixed and notice deposits 998,604 - 998,604
Commercial Paper 435,496 - 435,496
Loans from shareholders 84,970 - 84,970
28 February 2018*
(Restated)
R'000 South Africa North America Total
Interest Income 237,757 1,303,959 1,541,716
Interest expense (146,129) (62,102) (208,231)
Net interest income 91,628 1,241,857 1,333,485
Fee income 413,878 44,662 458,540
Management fee 66,909 62 66,971
income
Other operating 271,565 44,218 315,783
income
Fair value (68,958) 62,086 (6,872)
adjustment
Foreign exchange 52,355 (37) 52,318
gain/(loss)
Net Impairment (158,077) (342,339) (500,416)
charge on loans and
advances
Operating expenses (475,112) (821,332) (1,296,444)
Profit before 194,188 229,177 423,365
taxation
Taxation (70,498) (31,666) (102,164)
Profit for the year 123,690 197,511 321,201
Significant segment
assets
Cash and cash 248,575 173,764 422,339
equivalents
Other financial 216,709 147 216,856
assets
Unsecured loans and 354,768 386,896 741,664
other advances to
customers
Secured loans and 185,389 25,588 210,977
other advances to
customers
Trade and other 137,440 20,737 158,177
receivables
Property, plant and 68,629 63,187 131,816
equipment
Investment property 266,771 - 266,771
Goodwill 196,787 665,822 862,609
Intangible assets 171 107,864 108,035
Significant segment
liabilities
Fixed and notice 1,027,114 - 1,027,114
deposits
Commercial Paper 278,828 - 278,828
Loans from 470,586 - 470,586
shareholders
* Results for the 2018 financial year have been restated due to an error in
the fair value measurement of the previously written-off portfolio affecting;
Unsecured loans and advances to customers, Deferred taxation, Goodwill, Non-
controlling interest and Retained income. Please see additional information in
the notes to the consolidated financial statements to follow.
Notes to the audited consolidated financial statements
Finbond Group Limited is a company domiciled in South Africa. The audited
consolidated financial statements of the Company as at and for the twelve months
ended 28 February 2019 comprise the Company and its subsidiaries (together
referred to as the “Group”).
Basis of preparation
The audited consolidated financial statements have been prepared in accordance
with the requirements of the JSE Limited Listings Requirements and the
requirements of the Companies Act of South Africa. The audited consolidated
financial statements have been prepared in accordance with the framework
concepts and the measurement and recognition requirements of International
Financial Reporting Standards (“IFRS”).
The accounting policies applied by the Group in the audited consolidated
financial statements are consistent with those accounting policies applied in
the preparation of the previous consolidated annual financial statements except
for the adoption of new and amended standards as set out below.
The consolidated financial statements were prepared under the supervision of Mr
GW Labuschagne CA, CPA, in his capacity as chief financial officer.
Financial information and notes in this announcement are extracted from the
Group’s audited financial statements and are not themselves audited. The
directors take full responsibility that the financial information and notes as
presented have been correctly extracted from the Group’s audited financial
statements.
a) New and amended standards adopted by the Group
Several new or amended standards became applicable for the current reporting
period and the Group had to change its accounting policies and make
retrospective adjustments as a result of adopting the following standards:
• IFRS 9 Financial Instruments, and
• IFRS 15 Revenue from Contracts with Customers.
The impact of the adoption of these standards and the new accounting policies
are disclosed below. The other standards did not have any impact on the Group's
accounting policies.
b) Impact of standards issued but not yet applied by the Group
IFRS 16 Leases
IFRS 16 will replace IAS 17 Leases and three related Interpretations. It
completes the IASB's long running project to overhaul lease accounting. Leases
will be recorded in the statement of financial position in the form of a right-
of-use asset and a lease liability. There are two important reliefs provided by
IFRS 16 for assets of low value and short-term leases of less than 12 months.
Management is in the process of assessing the full impact of the Standard. The
Group believes that the most significant impact will be the recognition of a
right of use asset and a lease liability for the office and production buildings
currently treated as operating leases and concludes that there will not be a
significant impact to the finance leases currently held on the statement of
financial position.
At 28 February 2019 the future minimum lease payments amounted to R118,8
million. The nature of the expense of the above cost will change from being an
operating lease expense to depreciation and interest expense.
The Group adopted IFRS 16 on 1 March 2019 using the Standard's modified
retrospective transition method approach. Under this approach the cumulative
effect of initially applying IFRS 16 is recognised as an adjustment to equity
at the date of initial application. Comparative information is not restated.
The Group has elected to present right-of-use assets separately and lease
liabilities will be included in finance liabilities in the statement of
financial position.
Use of judgements and 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. Actual results may differ from these estimates.
In preparing these consolidated 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 annual financial statements as at and for the year ended 28
February 2018 except where the implementation of IFRS 9 requires a different
approach to the accounting previously applied, such as estimating the lifetime
losses of short-term receivables for the purposes of IFRS 9's expected credit
loss model.
Changes in significant accounting policies
The changes in accounting policies are also reflected in the Group’s
consolidated financial statements as at and for the year ending 28 February
2019.
The Group has initially adopted IFRS 9 Financial Instruments (see A below) and
IFRS 15 Revenue from Contracts with Customers from 1 March 2018. A number of
other new standards are effective from 1 January 2018, but they do not have a
material effect on the Group’s financial statements.
The adoption of IFRS 15 Revenue from Contracts with Customers has had no impact
on the Group’s financial statements.
The effect of initially applying these standards is mainly attributed to an
increase in impairment losses recognised on financial assets (see A(ii) below).
A. IFRS 9 Financial Instruments
IFRS 9 sets out requirements for recognising and measuring financial assets,
financial liabilities and some contracts to buy or sell non-financial items.
This standard replaces IAS 39 Financial Instruments: Recognition and
Measurement.
The following table summarises the impact, net of tax, of the transition to
IFRS 9 on the opening balance of unsecured loans and other advances to customers,
secured loans and other advances, reserves, retained earnings and NCI (for a
description of the transition method, see (iii) below).
Consolidated statement of financial position
R'000 28 February IFRS 9 1 March
2018 transition 2018
as presented adjustment restated
Assets
Cash and cash equivalents 422,339 - 422,339
Other financial assets 216,856 - 216,856
Unsecured loans and other 741,664 (2,874) 738,790
advances to customers
Trade and other receivables 158,177 - 158,177
Other assets 12,632 - 12,632
Secured loans and other 210,977 (5,109) 205,868
advances to customers
Property, plant and equipment 131,816 - 131,816
Investment property 266,771 - 266,771
Deferred taxation 14,215 - 14,215
Goodwill 862,609 - 862,609
Intangible assets 108,035 - 108,035
Total assets 3,146,091 (7,983) 3,138,108
Liabilities
Bank overdraft 91,033 - 91,033
Trade and other payables 124,029 - 124,029
Other liabilities 11,757 - 11,757
Current tax payable 42,073 - 42,073
Derivative financial instrument 47,430 - 47,430
Loans from shareholders 470,586 - 470,586
Fixed and notice deposits 1,027,114 - 1,027,114
Deferred taxation 9,882 (4,165) 5,717
Commercial paper 278,828 - 278,828
Total liabilities 2,102,732 (4,165) 2,098,567
Equity
Capital and reserves
Share capital 724,525 - 724,525
Reserves (deficit) (193,715) - (193,715)
Retained income 383,860 (10,176) 373,684
Share capital and reserves 914,670 (10,176) 904,494
attributable to ordinary
shareholders
Non-controlling interest 128,689 6,358 135,047
Total equity 1,043,359 (3,818) 1,039,541
Total equity and liabilities 3,146,091 (7,983) 3,138,108
Basic earnings per share (1.1)
(cents)
Diluted earnings per share (1.1)
(cents)
The adjustments to loans and other advances to customers could further be
explained as per the table below.
R'000 28 February IFRS 9 1 March
2018 transition 2018
as presented adjustment restated
Unsecured Loans and advances 971,770 - 971,770
before impairment
Allowances for impairment to (230,106) (2,874) (232,980)
loans and advances
Unsecured loans and other 741,664 (2,874) 738,790
advances to customers
Secured Loans and advances 234,832 - 234,832
before impairment
Allowances for impairment to (23,855) (5,109) (28,964)
loans and advances
Secured loans and other 210,977 (5,109) 205,868
advances to customers
The total impact on the Group's Retained earnings as at 1 March 2018 is as
follows:
R’000
Closing retained earnings at 28 February 2018 as presented 383,860
Increase in allowances for impairment for debt investments at (7,983)
amortised cost
Decrease in deferred tax liability relating to impairment 4,165
Non-controlling interest (6,358)
Opening retained earnings 1 March 2018 restated 373,684
The details of new significant accounting policies and the nature and effect of
the changes to previous accounting policies are set out below.
(i) Classification and measurement of financial assets and financial liabilities
IFRS 9 largely retains the existing requirements in IAS 39 for the
classification and measurement of financial liabilities. However, it eliminates
the previous IAS 39 categories for financial assets of held to maturity, loans
and receivables and available for sale.
The adoption of IFRS 9 has not had a significant effect on the Group’s accounting
policies related to financial liabilities. The impact of IFRS 9 on the
classification and measurement of financial assets is set out below.
Under IFRS 9, on initial recognition, a financial asset is classified as
measured at: amortised cost; Fair Value through Other Comprehensive Income
(FVOCI) – debt investment; FVOCI – equity investment; or Fair Value through
Profit and Loss (FVTPL).
The classification of financial assets under IFRS 9 is generally based on the
business model in which a financial asset is managed and its contractual cash
flow characteristics.
A financial asset is measured at amortised cost if it meets both of the following
conditions and is not designated as at FVTPL:
- it is held within a business model whose objective is to hold assets to
collect contractual cash flows; and
- its contractual terms give rise on specified dates to cash flows that are
solely payments of principal and interest on the principal amount
outstanding.
A financial asset (unless it is a trade receivable without a significant
financing component that is initially measured at the transaction price) is
initially measured at fair value plus, for an item not at FVTPL, transaction
costs that are directly attributable to its acquisition.
The following accounting policies apply to the subsequent measurement of
financial assets.
Financial assets at FVTPL These assets are subsequently measured at fair
value. Net gains and losses, including any
interest or dividend income, are recognised in
profit or loss.
Financial assets at These assets are subsequently measured at
amortised cost amortised cost using the effective interest
method. The amortised cost is reduced by
impairment losses (see (ii) below). Interest
income, foreign exchange gains and losses and
impairment are recognised in profit or loss. Any
gain or loss on derecognition is recognised in
profit or loss.
The effect of adopting IFRS 9 on the carrying amounts of financial assets at 1
March 2018 relates solely to the new impairment requirements, as described
further below.
The following table and the accompanying notes below explain the original
measurement categories under IAS 39 and the new measurement categories under
IFRS 9 for each class of the Group’s financial assets as at 1 March 2018.
Financial Assets Original New Original New
classification classification carrying carrying
under IAS 39 under IFRS 9 amount amount
R'000 R'000
Cash and cash Loans and Amortised cost 422,339 422,339
equivalents (a) receivables
Other financial Held to Amortised cost 105,566 105,566
assets maturity
Other financial Designated at FVTPL 111,290 111,290
assets FVTPL
Unsecured loans and Loans and Amortised cost 741,664 738,790
other advances to receivables
customers (b)
Secured loans and Loans and Amortised cost 210,977 205,868
other advances to receivables
customers
Other receivables Loans and Amortised cost 109,477 109,477
receivables
Total financial 1,701,313 1,693,330
assets
(a) Cash and cash equivalents that were classified as loans and receivables
under IAS 39 are now classified at amortised cost. These amounts were
previously stated at cost which approximates fair value due to the short-
term nature and consequently no adjustment was recognised in opening retained
earnings at 1 March 2018 on transition to IFRS 9.
(b) Unsecured loans that were classified as loans and receivables under IAS
39 are now classified at amortised cost.
(ii) Impairment of financial assets
IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘expected credit
loss’ (ECL) model. The new impairment model applies to financial assets measured
at amortised cost, contract assets and debt investments at FVOCI, but not to
investments in equity instruments.
The financial assets at amortised cost consist of unsecured loans, secured
loans, trade receivables, cash and cash equivalents, and corporate debt
securities.
Under IFRS 9, loss allowances are measured on either of the following bases:
– 12-month ECLs: these are ECLs that result from possible default events
within the 12 months after the reporting date; and
– lifetime ECLs: these are ECLs that result from all possible default events
over the expected life of a financial instrument.
The Group measures loss allowances at an amount equal to lifetime ECLs, except
for the following, which are measured as 12-month ECLs:
- debt securities that are determined to have low credit risk at the
reporting date; and
- other debt securities and bank balances for which credit risk (i.e. the
risk of default occurring over the expected life of the financial
instrument) has not increased significantly since initial recognition.
The Group has elected to measure loss allowances for unsecured loans, secured
loans, trade receivables and contract assets at an amount equal to lifetime
ECLs.
When determining whether the credit risk of a financial asset has increased
significantly since initial recognition and when estimating ECLs, the Group
considers reasonable and supportable information that is relevant and available
without undue cost or effort. This includes both quantitative and qualitative
information and analysis, based on the Group’s historical experience and
informed credit assessment and including forward-looking information.
The Group assumes that the credit risk on a financial asset has increased
significantly if it is more than 30 days past due.
The Group considers a financial asset to be in default when:
- the borrower is unlikely to pay its credit obligations to the Group in
full, without recourse by the Group to actions such as realising security
(if any is held); or
- the financial asset is more than 90 days past due.
The maximum period considered when estimating ECLs is the maximum contractual
period over which the Group is exposed to credit risk.
Measurement of ECLs
ECLs are a probability-weighted estimate of credit losses. Credit losses are
measured as the present value of all cash shortfalls (i.e. the difference
between the cash flows due to the entity in accordance with the contract and
the cash flows that the Group expects to receive).
ECLs are discounted at the effective interest rate of the financial asset.
Credit-impaired financial assets
At each reporting date, the Group assesses whether financial assets carried at
amortised cost are credit-impaired. A financial asset is ‘credit-impaired’ when
one or more events that have a detrimental impact on the estimated future cash
flows of the financial asset have occurred.
Presentation of impairment
Loss allowances for financial assets measured at amortised cost are deducted
from the gross amount of the assets. Impairment losses related to loans and
advances are presented separately in the statement of profit or loss.
Impairment losses on other financial assets are presented under ‘finance costs’,
similar to the presentation under IAS 39, and not presented separately in the
statement of profit or loss and OCI due to materiality considerations.
Impact of the new impairment model
For assets in the scope of the IFRS 9 impairment model, impairment losses are
generally expected to increase and become more volatile. The Group has
determined that the application of IFRS 9 impairment requirements at 1 March
2018 results in an additional impairment allowance as follows.
Unsecured Secured
loans loans
R'000 R'000
Loss allowance at 28 February 2018 under IAS 39 230,106 23,855
Additional impairment recognised at 1 March 2018: 2,874 5,109
Loss allowance at 1 March 2018 under IFRS 9 232,980 28,964
The following analysis provides further detail about the calculation of ECLs
related to loans and advances on the adoption of IFRS 9. The Group considers
the model and some of the assumptions used in calculating these ECLs as key
sources of estimation uncertainty.
The ECLs were calculated based on historical actual credit loss experience as
well as forward looking information. The Group performed the calculation of ECL
rates separately at the portfolio and product level.
Exposures within each group were segmented based on common credit risk
characteristics such as product, geographic region and delinquency status.
ECLs were calculated in line with the stage as driven by the delinquency status
of the financial asset. There are three stages:
- Stage 1 includes financial instruments where no significant increase in
risk (SICR) is prevalent. A 12-month ECL assessment is implemented.
- Stage 2 includes financial instruments where SICR is prevalent; a lifetime
ECL assessment is implemented.
- Stage 3 includes credit-impaired financial instruments where a lifetime ECL
assessment is implemented.
ECLs were then calculated using the derivation of term structured probability
of default (PD), exposure at default (EAD) and loss given default (LGD)
parameters as well as the effective rate of interest for discounting. The PDs
and LGDs are calculated in accordance with the specific stage of allocation and
discounting is done using the average effective interest rate which is
incorporated into the LGDs.
The following table provides information about the exposure to credit risk and
ECLs for unsecured and secured loans as at 1 March 2018.
R'000 Weighted Gross Loss
average carrying allowance
loss rate amount
Stage 1 10% 828,255 79,641
Stage 2 45% 259,405 116,880
Stage 3 55% 118,942 65,423
1,206,602 261,944
There were no significant changes during the period to the Group’s exposure to
credit risk.
(iii) Transition
Changes in accounting policies resulting from the adoption of IFRS 9 have been
applied retrospectively, except as described below.
- The Group has taken an exemption not to restate comparative information
for prior periods with respect to classification and measurement
(including impairment) requirements. Differences in the carrying amounts
of financial assets and financial liabilities resulting from the adoption
of IFRS 9 are recognised in retained earnings and reserves as at 1 March
2018. Accordingly, the information presented for 2018 does not generally
reflect the requirements of IFRS 9 but rather those of IAS 39.
- The following assessments have been made on the basis of the facts and
circumstances that existed at the date of initial application.
- The determination of the business model within which a financial
asset is held.
- The designation and revocation of previous designations of certain
financial assets and financial liabilities as measured at FVTPL.
- The designation of certain investments in equity instruments not
held for trading as at FVOCI.
- If an investment in a debt security had low credit risk at the date of
initial application of IFRS 9, then the Group has assumed that the credit
risk on the asset had not increased significantly since its initial
recognition.
Fair value measurement
Fair value hierarchy of instruments measured at fair value
The fair value hierarchy reflects the significance of the inputs used in making
fair value measurements. The level within which the fair value measurement is
categorised in its entirety, is determined on the basis of the lowest level
input that is significant to the fair value measurement in its entirety.
The different levels 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
R’000 Level 1 Level 2 Level 3 Total
Assets and liabilities
measured at fair value:
Recurring
Other financial assets - 121,031 358 121,389
Investment property - - 137,200 137,200
Foreign exchange derivative on
loans from shareholders - - (4,920) (4,920)
- 121,031 132,638 253,669
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 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.
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.
R’000
Gains
recognized
Opening in profit Capitalised Closing
Balance or loss expenditure balance
Assets
Investment properties 266,771 (129,607) 36 137,200
Liabilities
Derivative financial instrument (47,430) 52,350 - 4,920
No transfers of assets and liabilities within levels of fair value hierarchy
occurred during the current financial year.
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.
Correction of prior year error
Under IAS 39 and in accordance with the policies and procedures governing the
Group, overdue loans and advances were written off and fully derecognised. This
written off portfolio was managed as a group and actively and constantly
evaluated in line with Group risk management strategy.
Management estimated future recoveries in reviewing the carrying value of the
written-off portfolio to be recognised in loans and advances based on historic
trends. Management used the Discounted Cash Flow methodology to value the
written-off portfolio by:
• Estimating future cash flows expected from collection efforts on the
written-off portfolio;
• Estimating an appropriate discount rate based on the cost of equity; and
• Determining the net present value by discounting the expected future cash
flows using an appropriate discount rate.
Under IAS 39, upon initial recognition, the written-off portfolio was designated
at fair value through profit or loss. The Group applied this policy consistently
between 2009 and 2018 on a fair value basis in accordance with a documented
risk management strategy. Information about the group was provided internally
on that basis to the entity's key management personnel.
IFRS 13 however requires selecting a valuation technique that maximises the use
of relevant observable inputs and minimises the use of unobservable inputs. The
reliability of a fair value measurement derived from a valuation technique is
dependent on both the reliability of the valuation technique and the reliability
of the inputs used.
• When applying the fair value measurement, Finbond applied a discounted cash
flow valuation technique to estimated cash flows that were no longer linked
to the original counterparties to whom loans were advanced. The cash flows
were estimated and not supported by the underlying contractual cash flows,
hence estimates of possible collections based on past experience rather than
known amounts and counterparties.
• The valuation technique did not take into account appropriate risk adjusted
inputs reflecting the nature of the counterparties and the significant
measurement uncertainties relating to the cash flows.
This constitutes an error as a result of non-compliance with IFRS 13. The full
amount was considered an error because of insufficient data and impracticability
to quantify the amount relating to the error and the amount that would have
been transitioned to IFRS 9.
Finbond, as part of its earnings enhancing growth strategy, acquired a number
of short-term lending businesses in North America through business combinations
during the 2017 and 2018 financial years. American Cash Advance (100% interest
at acquisition), Cashbak LLC (56.13% interest at acquisition), AmeriCash Holding
LLC (50% interest at acquisition) and America's Financial Choice LLC (100%
interest at acquisition) included a written-off portfolio as a separately
identifiable asset on acquisition. Given the restatement, the net asset value
on acquisition of these entities decreased, resulting in an increase in goodwill
and a decrease in the non-controlling interest upon initial recognition.
The following tables summarise the impact on the Group's consolidated
financial statements for the years ended 28 February 2017 and 28 February
2018:
2017 Impact of correction of error
As
previously Adjustment As
R'000 reported s restated
Consolidated statement of financial position
Unsecured loans and other advances to 800,599 (181,582) 619,017
customers
Goodwill 752,699 29,602 782,301
Other asset items 1,643,800 - 1,643,800
Total assets 3,197,098 (151,980) 3,045,118
Deferred taxation 55,043 (33,716) 21,327
Other liability items 1,980,138 - 1,980,138
Total liabilities 2,035,181 (33,716) 2,001,465
Retained income 292,351 (86,822) 205,529
Non-controlling interest 226,249 (31,442) 194,807
Other equity items 643,317 - 643,317
Total equity 1,161,917 (118,264) 1,043,653
2018 Impact of correction of error
As
previously Adjustment As
R'000 reported s restated
Consolidated statement of financial position
Unsecured loans and other advances to 937,391 (195,727) 741,664
customers
Goodwill 830,077 32,532 862,609
Other asset items 1,541,818 - 1,541,818
Total assets 3,309,286 (163,195) 3,146,091
Deferred taxation 45,704 (35,822) 9,882
Other liability items 2,092,850 - 2,092,850
Total liabilities 2,138,554 (35,822) 2,102,732
Retained income 477,442 (93,582) 383,860
Reserves (194,581) 866 (193,715)
Non-controlling interest 163,346 (34,657) 128,689
Other equity items 724,525 - 724,525
Total equity 1,170,732 (127,373) 1,043,359
Consolidated statement of comprehensive income
Net impairment charge on loans and (484,238) (16,178) (500,416)
advances
Taxation (104,582) 2,419 (102,163)
Others 923,781 - 923,781
Profit after taxation 334,961 (13,759) 321,202
Foreign currency translation (140,825) 4,650 (136,175)
difference for foreign operations
Total comprehensive income for the 194,136 (9,109) 185,027
year
Profit attributable to :
Owners of the company 234,201 (6,759) 227,442
Non-controlling interest 100,760 (7,000) 93,760
334,961 (13,759) 321,202
Total comprehensive income attributable to :
Owners of the company 118,824 (5,894) 112,930
Non-controlling interest 75,312 (3,215) 72,097
194,136 (9,109) 185,027
Events after the reporting period
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.
Due to the once off abnormal fair value write downs to the Investment Property
Portfolio, as a result of a year-end adjustment, retroactively after year end,
Finbond Mutual Bank’s minimum regulatory capital requirement as at 28 February
2019 reflected a shortfall of R40.3 million to the R202.3 million (25% of Risk
Weighted Assets) required by the Prudential Authority, and an excess of R81.0
million over and above the required qualifying regulatory capital per Basel
III. Although Finbond as a Mutual Bank is not subject to the Basel III
requirements, Finbond already complies with, and exceeds, all Basel III
requirements. As at 28 February 2019, Finbond’s:
• internally calculated liquidity coverage ratio was 290% (190% more than
required);
• internally calculated net stable funding ratio was 805% (705% more than
required); and
• capital adequacy ratio was 20.01% (10.01% more than required under Basel
III), but 4.99% below the minimum prudential limit required by the
Prudential Authority.
In order to immediately address and rectify the reduction in capital caused by
the once off abnormal fair value adjustment to Investment Properties, Finbond
Group Limited recapitalized Finbond Mutual Bank, in the amount of R 40 million,
at the end of May 2019. Following the recapitalization, Finbond Mutual Bank’s
required qualifying regulatory capital (based on 30 April 2019 DI returns),
reflected an excess of R28.3 million to the R194.0 million (25% of Risk Weighted
Assets) required by the Prudential Authority, and an excess of R144.7 million
over and above the required qualifying regulatory capital per Basel III.
Following the May 2019 recapitalization (and based on 30 April 2019 DI returns),
Finbond’s:
• internally calculated liquidity coverage ratio was 168% (68% more than
required);
• internally calculated net stable funding ratio was 647% (547% more than
required); and
• capital adequacy ratio was 28.64% (18.64% more than required in terms of
Basel III), and 3.64% above the minimum prudential limit required by the
Prudential Authority.
Independent auditor's opinion
The Group’s consolidated financial statements have been audited by the Company’s
auditors, SNG Grant Thornton, who have expressed an unmodified opinion. The
audited Group consolidated financial statements, as well as unmodified audit
opinion, are available for inspection at the Company’s registered office.
References to future financial performance included anywhere in this
announcement have not been reviewed or reported on by the Group’s external
auditors.
For and on behalf of the Board
Dr Malesela Motlatla Dr Willem van Aardt
31 May 2018
--------------------------------------------------------------------
Directors
Chairman: Dr MDC Motlatla* (BA, DCom (Unisa)); Chief Executive Officer: Dr W
van Aardt (BProc (Cum Laude), LLM (UP), LLD (PUCHE) 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: GW Labuschagne (CPA (CA), CA (SA), BCom (Hons Acc), BCom
(Fin Acc)(cum laude)); PA Naudé*(BCom (Marketing), Gaining Competitive
Advantage (Michigan), IEP (INSEAD))*; Adv. N Melville* (B Law, LLB (Natal) LLM
(Cum Laude)(Natal) SEP (Harvard); RN Xaba* (CA)(SA) BCompt, BCompt (Hons)
(Unisa); DJ Brits* (B Com, MBA) (NW); HG Kotze* (BCom (Acc)(Hons), HDip Tax,
Certificate in Treasury Management); Chief Operating Officer: C van Heerden
(MBA).
Secretary: Ben Bredenkamp (B Com Accounting, LLB (UP), MBA (Edinburgh))
*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: 31/05/2019 05:45:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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