Wrap Text
Provisional audited results for the year ended 30 June 2020
FIRSTRAND LIMITED
(Incorporated in the Republic of South Africa)
Registration number: 1966/010753/06
JSE ordinary share code: FSR; ISIN code: ZAE000066304
JSE B preference share code: FSRP; ISIN code: ZAE000060141
NSX ordinary share code: FST
LEI: 529900XYOP8CUZU7R671
(FirstRand or the group)
PROVISIONAL AUDITED RESULTS FOR THE YEAR ENDED 30 JUNE 2020
FirstRand's portfolio of integrated financial services businesses comprises FNB, RMB, WesBank, Aldermore and Ashburton Investments. The group operates in South
Africa, certain markets in sub-Saharan Africa and the UK, and offers a universal set of transactional, lending, investment and insurance products and services.
"The COVID-19 pandemic is a once in a generation event and has had a profound impact on the world. In South Africa it resulted in the deepest GDP contraction since
the Second World War. The lockdown devastated the economy and it will be a long hard road back to recovery.
FirstRand's performance for the year to 30 June 2020 reflects the depth of the crisis. However, the group believes that the actions it has taken to strengthen and protect
its balance sheet, combined with the structure of its portfolio and its chosen strategies, will ensure ROE and earnings recovery once the current stress scenario
normalises."
Alan Pullinger
CEO
FINANCIAL HIGHLIGHTS
R million 2020 2019 % change
Basic and diluted normalised earnings per share (cents) 307.8 497.3 (38)
Normalised earnings 17 265 27 894 (38)
Headline earnings 17 326 27 887 (38)
Normalised net asset value per share (cents) 2 453.1 2 311.3 6
Ordinary dividend per share (cents) 146.0 291.0 (50)
Normalised ROE (%) 12.9 22.8
Basic and diluted headline earnings per share (cents) 308.9 497.2 (38)
Basic and diluted earnings per share (cents) - IFRS* 303.5 538.6 (44)
Net asset value per share (cents ) - IFRS 2 453.1 2 311.8 6
Advances (net of credit impairment) 1 261 715 1 205 752 5
Deposits 1 535 015 1 393 104 10
Credit loss ratio (%) 1.91 0.88
* Prior year attributable earnings and earnings per share include the after-tax profit on sale of c. R2.3 billion on the Discovery card transaction, which is excluded from
headline and normalised earnings.
OVERVIEW OF RESULTS
FirstRand's results for the year to 30 June 2020 reflect the extremely difficult operating environment, with normalised earnings decreasing 38% to R17.3 billion
compared to 30 June 2019. ROE declined to 12.9%. Most of this decline was due to the much higher than expected credit impairment charge, driven by forward-looking
economic assumptions required under IFRS 9. In addition, post the beginning of lockdown in March 2020, underlying customer income and affordability in all segments
deteriorated sharply, as evidenced by lower levels of underlying transactional and credit turnover and in the amount of debt relief requested by customers, resulting in
increased arrears and non-performing loans (NPLs).
The group's capital position remained strong, with a Common Equity Tier 1 (CET1) capital adequacy ratio of 11.5%. However, despite this healthy position, the board has
not declared a final dividend given the Prudential Authority's (PA's) current guidance to preserve capital.
The table below reflects the breakdown of sources of normalised earnings
Sources of normalised earnings
Year ended 30 June
R million 2020 % composition 2019 % composition % change
FNB 12 271 70 17 745 64 (31)
- FNB South Africa 12 033 17 178 (30)
- FNB rest of Africa 238 567 (58)
RMB 5 819 34 6 975 25 (17)
WesBank 843 5 1 808 6 (53)
UK operations* 865 5 2 292 8 (62)
- Aldermore*,** 1 020 1 722 (41)
- MotoNovo* (155) 570 (+100)
FirstRand Corporate Centre (FCC) (includes Group Treasury)*,#,+ (1 630) (9) (329) (1) +100
Ordinary equity instrument holders (903) (5) (597) (2) 51
Normalised earnings 17 265 100 27 894 100 (38)
* During May 2019, a new legal entity, MotoNovo Finance Limited, was established under the Aldermore Group where all new MotoNovo business since May 2019 has
been originated (also referred to as the MotoNovo new book). In the UK operations management view shown in the table, Aldermore refers to Aldermore excluding
MotoNovo new book and MotoNovo refers to the standalone performance of MotoNovo which includes the new book and back book. The 2019 figures for FCC and
Aldermore in the table above have been restated to reflect the management view of total UK operations.
** After the dividend on the contingent convertible securities of R242 million (2019: R163 million).
# Includes capital endowment, the impact of accounting mismatches, and interest rate, foreign currency and liquidity management.
+ Includes FirstRand Limited (company).
Pre-provision operating profit showed a decrease of 2%, which points to a resilient operating performance, despite margin pressure, subdued non-interest revenue growth
due to lower absolute volumes during the lockdown period, and depressed new business origination.
Pre-provision operating profit
Year ended 30 June
R million 2020 2019 % change
FNB 32 349 32 292 -
RMB 11 669 10 271 14
WesBank 4 249 4 565 (7)
UK operations 4 845 4 453 9
FCC/Group Treasury (4 811) (2 393) +100
Total group pre-provision operating profit 48 301 49 188 (2)
- FNB demonstrated operational resilience, supporting its retail, small- and medium-sized enterprise (SME) and commercial customers through a range of debt relief
propositions and multi-channel transactional solutions. As South Africa's leading digital bank, FNB was able to fulfil origination, account service and liability gathering
digitally throughout the lockdown, with particularly strong growth in deposits.
- RMB delivered solid annuity income growth, underpinned by disciplined balance sheet deployment, with good growth in core advances and deposits. RMB's
portfolio benefited from strong flow-trading activities in Nigeria, and the overall performance of RMB's rest of Africa franchise offset, to some degree, the pressures
experienced in the domestic businesses.
- WesBank's pre-provisioning operating profit was impacted by lower associate earnings. Excluding this impact, pre-provisioning profits would have been flat year-on-
year. The business continued to extract efficiencies.
- Aldermore grew customers on the back of advances and deposit growth.
COVID-19 created unprecedented economic stress, which has had a profound and far-reaching impact on the economy. One of the implications of this stress was the
need to provide payment relief solutions for customers. For the South African businesses, some of these solutions are outlined below:
- Retail customers in good standing were offered emergency funds designed to bridge short-term liquidity needs and provide cash flow relief. The loans were priced
at the prime interest rate with zero fees and a flexible repayment period starting three months after relief was taken up. No early settlement penalties are levied. This
customer-centric approach covers all FNB products and those WesBank customers who bank with FNB. Payment holidays were also offered.
- FNB provided relief to commercial customers primarily in the form of payment holidays and additional relief was offered to SMEs through the government-guaranteed
loan scheme.
- For corporate, relief was advanced on a case-by-case basis. Corporate relief was provided in the form of additional liquidity facilities, payment holidays and covenant
waivers.
Eligibility for relief followed a risk-based approach and was assessed at an overall customer level.
For retail customers industry guidance set by the Banking Association of South Africa (BASA) was followed. Corporate and commercial portfolios were assessed against
the respective sector's sensitivity to the impact of COVID-19.
In the UK, Aldermore's focus was on providing forbearance for existing clients.
Debt relief
Underlying
gross
advances Total % of
for which portfolio** portfolio
Number of Number of relief was (gross for which
customers accounts provided advances) relief was
(thousands) (thousands) (R million) (R million) provided
Retail* 203.3 674.3 68 834 473 102 15%
Commercial 16.7 31.0 30 832 135 030 23%
Corporate n/a n/a 58 083 359 704 16%
UK operations 86.7 86.7 71 889 306 246 23%
Total group 306.7 792.0 229 638 1 311 095 18%
* Includes FNB rest of Africa core banking customers.
** Total group portfolio includes FCC advances.
Revenue and cost overview
Total group net interest income (NII) increased 4% on the back of resilient balance sheet growth, offset by margin compression given the endowment impact from interest
rate cuts. Net interest margin (NIM) declined 30 bps to 445 bps, reflecting a higher proportional increase in liquid assets due to strong growth in deposits whilst advances
growth slowed. Advances increased 6% (1% in constant-currency terms) and deposits grew 10% (7% in constant-currency terms). Growth in advances and deposits is
unpacked by operating business below.
Growth in Growth in
advances % deposits %
FNB 3 17
- Retail 4 16
- Commercial 3 19
- Rest of Africa 1 19
RMB 2 -
WesBank (2) 24
Aldermore and MotoNovo* 4 21**
* In pound terms.
** Reflects growth in customer deposits.
Advances growth in FNB occurred mainly in the premium and commercial segments, with the consumer segment sharply down, reflecting the lack of capacity in lower-
income households to take on credit. Overall retail advances growth declined significantly during lockdown reflecting depressed demand and cautious credit origination. At
WesBank, the decline in advances reflects the material drop in applications during the first two months of lockdown.
Advances growth to the corporate and commercial sectors was muted due to weak macroeconomic conditions and low levels of business confidence. This was further
compounded by the impact of COVID-19.
Deposit growth benefited from strong momentum in savings and investment products and retail customer balances increasing pre- and during lockdown. Commercial
customers maintained liquidity to support cash flow demands given the prevailing uncertainty, and large corporate deposit growth was underpinned by clients holding
higher current account balances.
The group's operational NIR was down 1% reflecting a reduction in fee and commission income, and negative growth in insurance income of 5% and investment income
of 14%. This was partly offset by a 32% increase in revenue from markets' trading activities.
FNB's NIR declined 2% due to the significant decrease in volumes during lockdown. FNB assisted customers by waiving SASwitch fees, rental relief on speedpoints and
other devices, and data charges. In addition, as part of its annual pricing review (pre-pandemic), FNB had already reduced certain fee categories. These factors collectively
impacted NIR by approximately R529 million.
The decline in insurance income was driven by increased credit life and death claims and forward-looking claims provisions. Pleasingly in-force annual premium
equivalent (APE) grew 7% (non-credit life APE increased 14%). The number of new policies declined 2% despite strong growth in underwritten life products.
RMB's private equity income declined due to impairments raised on a limited number of investments in the portfolio reflecting the pressures in the underlying economy.
This was despite an uptick in realisations and resilient annuity income which benefited from investments made in previous periods and the current year.
Growth in operating expenses was contained at 3%, reflecting the focus on cost management and lower variable staff expenditure given current year performance, and
was achieved despite continued investment in:
- insurance and asset management growth strategies;
- platforms to extract further efficiencies;
- the build-out of the group's footprint in the rest of Africa; and
- the process and system modernisation of the UK business.
Additional costs incurred were associated with managing employee and customer wellbeing on premises and in branches, and the rapid facilitation of remote working for
a significant proportion of staff when lockdown commenced.
Despite the level of cost containment, given the degree of pressure on the topline, the group's cost-to-income ratio increased to 52.9%.
Credit performance
FirstRand has revised its macroeconomic outlook for 2020/21, with material downward revisions to key economic variables affecting the group's activities, including a
sharp contraction in real GDP of 8%, a significant increase in unemployment and weakness in property markets. These revisions have been incorporated into the group's
credit provision models in line with IFRS 9 requirements, with all segments and portfolios experiencing notable incremental impacts from forward-looking adjustments.
This, together with arrears (up 42%), resulted in performing provisions increasing R9 billion, mainly driven by conservative coverage ratios. Group NPLs increased 39% to
4.37% of advances (2019: 3.33%). This required further provision of R6.2 billion, however, coverage has been largely maintained.
All of this combined resulted in a R15.2 billion (45%) increase in provisions (2019: R5.1 billion increase) held against loans and advances across all stages, products
and portfolios. The following table unpacks these movements and operational credit losses, and explains the group's materially higher credit impairment charge of R24.4
billion, and the credit loss ratio increase to 191 bps (2019: 88 bps).
Analysis of impairment charge
%
R million 2020 2019 change
Performing book provisions 9 040 945
NPL provision 6 178 4 152
Credit provision increase 15 218 5 097 +100
Modification 1 007 633 59
Write-off and other 10 532 7 318 44
Post write-off recoveries (2 374) (2 548) (7)
Total impairment charge 24 383 10 500 +100
All provisions raised reflect the group's best estimates against available data and scenario analysis (see pages 183 to 187 of the online version for detailed macro
forecasts) and are considered appropriately prudent given the prevailing risk in the system. In addition, the group has conservatively provided for a sharp increase in credit
life retrenchment claims, taking account of the latest economic outlook together with write-downs on non-private equity investments - these are reflected under NIR.
The table below unpacks all movements in NPLs.
Total group NPLs
Percentage
point
contribution
to overall
NPL
R million % change increase
Operational NPLs 10 393 39 25
Loans under COVID-19 relief 1 910 - 5
Restructured debt review 280 8 1
Definition of rehabilitation (technical cures) (622) (15) (2)
Lengthening of write-off period 696 19 2
NPLs (excluding UK operations) 12 657 33 31
UK operations 3 275 96 8
Total group NPLs 15 932 39 39
Segmental analysis of normalised earnings
Year ended 30 June
% % %
R million 2020 composition 2019 composition change
Retail 7 663 44 12 795 46 (40)
- FNB* 6 998 11 323
- WesBank 665 1 472
Commercial 5 451 32 6 758 24 (19)
- FNB 5 273 6 422
- WesBank 178 336
Corporate and investment banking 5 819 34 6 975 25 (17)
- RMB 5 819 6 975
UK operations** 865 5 2 292 8 (62)
- Aldermore**,# 1 020 1 722
- MotoNovo** (155) 570
Other (2 533) (15) (926) (3) +100
- FCC (including Group Treasury)** (1 630) (329)
- Other equity instruments (903) (597)
Normalised earnings 17 265 100 27 894 100 (38)
* Includes FNB rest of Africa.
** During May 2019, a new legal entity, MotoNovo Finance Limited, was established under the Aldermore Group where all new MotoNovo business since May 2019
has been originated (also referred to as the MotoNovo new book). In the UK operations management view shown in the table above, Aldermore refers to Aldermore
excluding MotoNovo new book and MotoNovo refers to the standalone performance of MotoNovo which includes the new book and back book. The 2019 figures for
FCC and Aldermore in the table above have been restated to reflect the management view of total UK operations.
# After the dividend on the contingent convertible securities of R242 million (2019: R163 million).
DIVIDEND STRATEGY
The board noted the guidance from the PA regarding dividends. Despite the group's healthy capital position which has built up over many years of strong capital
generation, the board has not declared a final dividend. However, it's important to recognise that regular and sustainable dividends, apart from being a material part of
any shareholder investment proposition, matter to many beneficiaries dependent on these cash flows, such as pension fund members and, specifically, the FirstRand
Empowerment Foundation, whose corporate social investment (CSI) activities will be materially constrained.
At this stage, the board has not adjusted the group's dividend strategy or long-term cover range.
As previously stated, the board will revisit the cover range should:
- capital demand increase to support sustainable balance sheet growth; and/or
- macro risks materially trend outside of the group's current scenarios.
PROSPECTS
Economic activity in South Africa is expected to start to rebound from the depths of the first half of 2020. This is mainly linked to the easing of lockdown measures and
could stem the level of job losses and support the start of a recovery. However, given the South African government's limited capacity to inject further stimulus into the
economy, there will be ongoing permanent damage to household and business balance sheets. This will limit the extent to which the economy will be able to recoup the
output losses sustained during the first half of the year. As a result, private sector credit growth will remain weak and activity levels will continue to trend lower than
pre-crisis.
The UK is likely to recover faster, as households and business activity rebound following the easing of lockdown conditions and the government's significant stimulus
measures. This rebound will, however, face the added complexity of Brexit uncertainty during the latter part of 2020, which may constrain growth.
For FirstRand, the economic impact of COVID-19 will continue to place acute pressure on the group's performance for the rest of the 2020 calendar year. Trends post
lockdown are improving as the economic recovery slowly emerges, however, activity levels will remain muted on a relative basis, balance sheet growth will be subdued,
and the credit performance will not materially improve. Whilst this will translate into a recovery of earnings for the six months to December 2020 on a rolling six-month
basis, the period-on-period performance compared to the six months to December 2019 (a pre-COVID-19 period) will be a further reduction given the significant base
effect.
FirstRand anticipates an upward trajectory in earnings in the second half six months to June 2021, although the absolute level of earnings on a year-on-year basis are
unlikely to revert back to June 2020 levels.
FirstRand believes that the actions it has taken to strengthen and protect its balance sheet, combined with the structure of its portfolio and the strategies it continues to
execute on, will ensure ROE and earnings recovery once the current stress scenario normalises.
BOARD CHANGES
Changes to the directorate are outlined below.
Effective date
Resignations
JJ Durand Alternate non-executive director 28 November 2019
PJ Makosholo Independent non-executive director 30 June 2020
HL Bosman Non-executive director 30 June 2020
Retirements
NN Gwagwa Independent non-executive director 28 November 2019
EG Matenge-Sebesho Independent non-executive director 28 November 2019
APPOINTMENT
Z Roscherr Independent non-executive director 1 April 2020
DIVIDENDS
Ordinary shares
In line with Guidance Note 4 of 2020, Recommendations on the distribution of dividends on ordinary shares and payment of cash bonuses to executive officers and
material risk takers, in light of the negative economic impact of the COVID-19 pandemic and the temporary regulatory capital relief provided by the Prudential Authority,
issued on 6 April 2020, the group has not declared a final dividend for the year ended 30 June 2020.
Year ended
30 June
Cents per share 2020 2019
Interim (declared 9 March 2020) 146.0 139.0
Final N/A 152.0
146.0 291.0
B preference shares
Dividends on the B preference shares are calculated at a rate of 75.56% of the prime lending rate of FNB, a division of FirstRand Bank Limited.
Preference
Cents per share dividends
Period:
28 August 2018 - 25 February 2019 381.7
26 February 2019 - 26 August 2019 384.2
27 August 2019 - 24 February 2020 374.7
25 February 2020 - 31 August 2020 306.0
WR JARDINE AP PULLINGER C LOW
Chairman CEO Company secretary
10 September 2020
OTHER INFORMATION
This announcement covers the provisional audited summary consolidated financial results of FirstRand Limited based on International Financial Reporting Standards for
the year ended 30 June 2020. The primary results and accompanying commentary are presented on a normalised basis as the group believes this most accurately
reflects its economic performance. The normalised results have been derived from the IFRS financial results. A detailed description of the difference between normalised
and IFRS results is provided on pages 149 and 150, and pages 162 to 167 of the Analysis of financial results booklet. It constitutes the group's full announcement and is
available at www.firstrand.co.za/investors/financial-results/. Commentary is based on normalised results, unless otherwise indicated.
The full set of consolidated financial statements for the year ended 30 June 2020 have been audited by the group's auditors, PricewaterhouseCoopers Inc and Deloitte &
Touche, who expressed an unmodified audit opinion thereon.
The content of this announcement is derived from audited information, but is not itself audited. The directors take responsibility for the preparation of this announcement.
Any forecast financial information contained herein has not been reviewed or reported on by the group's external auditors.
Management determines the critical judgemental items that require specific attention annually. In the current year these related to:
- impairment of advances - specific additional disclosure is provided on pages 171 to 192 of the Analysis of financial results; and
- the valuation of complex financial instruments - specific additional disclosure is provided on pages 193 to 210 of the Analysis of financial results.
Further, additional disclosure has been included in the unaudited section of the Analysis of financial results on pages 53 to 69, and 85 to 124, relating to the impairment
of advances.
IFRS 16 was adopted effective 1 July 2019 and the statement of financial position as at 1 July 2019 was restated. Other comparatives were not restated, as allowed by
IFRS 16. The amendments to IAS 12 were adopted retrospectively and comparative information was restated. AT1 instruments were reclassified from financial liabilities to
equity, with a corresponding reclassification from NII to dividends paid. Customer loyalty related expenses were reclassified from operating expenses to fee and
commission expenses in NIR. Information relating to the impact of new and amended IFRS, the impact of restatements and changes in presentation are included in the
Analysis of financial results for the six months ending 31 December 2019.
Shareholders are advised that this announcement represents a summary of the information contained in the Analysis of financial results (the full announcement) and does
not contain full or complete details.
Any investment decisions by investors and/or shareholders should be based on consideration of the announcement as a whole and shareholders are encouraged to
review the full Analysis of financial results, which is available for viewing on the group's website and on
https://senspdf.jse.co.za/documents/2020/JSE/ISSE/FSR/FSR0620.pdf
The full Analysis of financial results, Annual financial statements and related audit reports are available for inspection and/or collection from FirstRand's registered office,
4 Merchant Place, corner Fredman Drive and Rivonia Road, Sandton and the offices of the sponsors, Rand Merchant Bank (a division of FirstRand Bank Limited), 1
Merchant Place, corner Fredman Drive and Rivonia Road, Sandton. The above is available to investors and/or shareholders at no charge during normal business hours
from 11 September 2020.
DIRECTORS
WR Jardine (chairman), AP Pullinger (chief executive officer), HS Kellan (financial director), M Vilakazi (chief operating officer), MS Bomela, JP Burger, GG Gelink,
F Knoetze, RM Loubser, TS Mashego, AT Nzimande, Z Roscherr, LL von Zeuner, T Winterboer
COMPANY SECRETARY AND REGISTERED OFFICE
C Low
4 Merchant Place, Corner Fredman Drive and Rivonia Road
Sandton 2196
PO Box 650149, Benmore 2010
Tel: +27 11 282 1808
Fax: +27 11 282 8088
Website: www.firstrand.co.za
JSE SPONSOR
Rand Merchant Bank (a division of FirstRand Bank Limited)
1 Merchant Place, Corner Fredman Drive and Rivonia Road
Sandton 2196
Tel: +27 11 282 8000
NAMIBIAN SPONSOR
Simonis Storm Securities (Pty) Ltd
4 Koch Street
Klein Windhoek
Namibia
TRANSFER SECRETARIES - SOUTH AFRICA
Computershare Investor Services (Pty) Ltd
1st Floor, Rosebank Towers
15 Biermann Avenue
Rosebank, Johannesburg, 2196
Private Bag X9000, Saxonwold, 2132
Tel: +27 11 370 5000
Fax: +27 11 688 5248
TRANSFER SECRETARIES - NAMIBIA
Transfer Secretaries (Pty) Ltd
4 Robert Mugabe Avenue, Windhoek
PO Box 2401, Windhoek, Namibia
Tel: +264 612 27647
Fax: +264 612 48531
AUDITORS
PricewaterhouseCoopers Inc.
4 Lisbon Lane
Waterfall City
Jukskei View
2090
Deloitte & Touche
5 Magwa Crescent
Waterfall City
Johannesburg
Gauteng
South Africa
2090
10 September 2020
Date: 10-09-2020 08:30:00
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