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Firstrand - a pleasing result (interims)

28 February 2006 Angelo Coppola

The Firstrand interim results show that the FNB and Discovery businesses outperformed the bank for the first time.

* Fully diluted headline earnings per share +20%

*Normalised earnings +19% - this will be the measure to determine payout levels to shareholders

* Dividend +20%

* Return on equity excluding treasury shares 25%

* Net Asset value +19%

Speaking to analysts at their results presentation in Johannesburg today, Paul Harris of the Firstrand group said that the size of the information pack is indicative of the depth of reporting, and specifically IFRS.

Harris said that the economic environment changes several years ago were faced with a decision in terms of cyclical or structural change was needed. They called it a structural shift and the last couple of years have seen lower interest rates, inflation and solid growth.

Looking forward Harris says that generally their operating companies had increased market share. The drivers were new business, leverage, innovation, acquisitions, capital management.

Innovation is in the DNA of the group, Harris claims, and prizes and incentives are in place to reward. He cited the 1account, cellphone banking, with some 2.7m customers on the in-contact service, via cellphone, and Wesbank.

Leverage is epitomised by the broker force establishment 500 banking consultants are paid on commission only - going down the road to more variable costs, offering banking and new age insurance products. Short term insurance has also seen a new business launched, to compete with Santam and M&F. To share a little in what the other two players are enjoying, says Harris.

Bancassurance is the ultimate leverage, with the profits climbing 36% over the last year.

Acquisitions are another driver. Sage was absorbed in 100 days and policy costs have been reduced, will broker numbers have increased, and the investment in the African Life health business.

Diversification can carry some of the worse performing businesses such as the African business, due to the weakening of the Pula, although Harris says that there are plans in place to rectify the situation.

In terms of banking - strong volumes, growth in retail advances and growth in the equity markets, while on the down side is pressure from competitors and margins that have been squeezed.

The insurance and asset management business have boomed, although the savings pool hasnt grown to anticipated levels and there have been margin squeezes and competitor pressure.

OUTsurance has out-performed and there is strong organic growth, with the challenges being cost efficiencies.

FD Johan Burger says that it was a pleasing performance. On the momentum level the National Treasury settlement has affected their numbers, while for the first time the Discovery and momentum numbers have outgrown the banking group for the first time.

Reconciling the numbers and to make them comparative set of numbers will take a rocket scientist some time to compute, due to the IFRS requirements.

On the banking group level 46% of the profits came from FNB, while RMB contributed 21%, and Wesbank was also up, contribution wise.

An issue going forward is the mix of incremental funding has to come from the professional market which will lead to margin squeeze.

Bad debts have bottomed out and are moving sideways. On the arrears levels and Wesbank, these seem to be going down, with consumer borrowing levels ticking up. The up-tick hasnt resulted in an increase in non-performing loans. Not a concern yet.

The experience has reduced considerably and Harris maintains that it has reduced to abnormally low levels. They are also conservative in their approach. Increased consumer indebtedness, while not showing in the numbers yet, must be a concern, as there seems to be a slight increase in non performing loans.

They are after all bankers and therefore worry about debt. They are bullish because market share growth

Costs

The group is investing for growth, up 19%, as the group enters a new phase. FNB increased cost up 18%, including investing in cellphone banking developments.

RMB increased costs by 64%. The biggest contributor was in chasing new business in the offshore equity market, infrastructure and base costs.

Wesbank was up 21%, investing in new business, infrastructure like the digital pen, people most of whom are temporary workers so the winding up if needed is simple.

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ANSWER

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