FirstRand produces strong top-line growth

FirstRand Limited (FirstRand), the integrated financial services group, today announced results for the year to 30th June 2006.

HIGHLIGHTS

Normalised earnings+ 21%
Dividend per share+ 20%
Return on Equity25%
Total assets+ 24%

Commenting on the results, Paul Harris, Group CEO said:

"The South African economy remained very strong during the financial year which provided both our banking and insurance businesses with significant organic growth opportunities. The combination of this positive environment, combined with the successful growth strategies pursued by the Groups underlying businesses, resulted in an excellent overall performance".

REVIEW OF OPERATIONS

FirstRand Banking Group, which produced normalised earnings growth of 20% to R7.2 billion, benefited from an outstanding performance from RMB and strong performances from FNB and WesBank. Sustained low interest rates continued to result in strong advances growth for FNB and WesBank although margins declined due to competitive and funding pressures. The strong equity markets and a healthy pipeline of BEE transactions underpinned the excellent performance of a number of RMBs businesses.

Momentum Group delivered strong results in what remained a challenging operating environment, growing normalised earnings 23% to R 1.6 billion. The combination of buoyant equity markets and the continued success of Momentums distribution model, resulted in a significant increase in lump sum investment inflows. Sales of recurring premium risk policies continued to also show strong growth, although sales of recurring premium investment products were negatively impacted by a reduction in retirement annuity sales.

Discovery delivered a strong performance growing normalised earnings by 34% to R424 million. This performance reflects Discoverys successful organic growth strategy.

FNB produced excellent results for the year, with profit before tax increasing 22% to R5.06 billion. Its segment strategy continues to be successful as it facilitates product innovation and differentiation.

Interest income grew by 19%, as a result of the strong asset growth. Non interest income increased 21% due to growth in customer numbers and transaction volumes.

Bad debts increased however this was anticipated given the abnormally low levels of arrears in the past few years. Pricing strategies have taken these new levels into account.

Operating expenses increased by 16%, although much of this growth reflected variable costs such as new business expenses and investments in the network and processes. Base costs only increased by 9%.

Advances increased 31%, with FNB HomeLoans growing advances 40% to R81 billion. The One Account also grew strongly and increased its loan book to R4.9 billion from R3.1 billion.

FNB Card grew advances by 36% to R9 billion resulting from increased customer numbers and customer spending, with card turnover up 33%.

Although FNB grew advances to the medium corporates, large corporate lending continued to decline, reflecting the banks stated strategy to focus on transactional banking in this segment.

Deposits grew by 20% with particularly good growth from corporates. FNB continued with its strategy to attract retail deposits and the Million a Month account increased its customer base to 400 000 accounts, contributing positively to the overall retail deposit growth.

RMB delivered an exceptional performance growing pre tax profit growth by 38%. This performance was underpinned by the strong growth from the equity businesses, particularly equity trading and private equity. BEE activity was also positive for the debt and advisory divisions.

RMBs strategy to focus on managing client relationships has been extremely successful and provided good growth opportunities during the year.

The Private Equity business delivered an outstanding performance. The strong equity market provided good opportunities for realisations which resulted in significant growth in equity accounted earnings. The unrealised profit in the remainder of the portfolio also increased and BEE continued to provide good opportunities to invest in new assets at reasonable prices. Equity Trading recorded another strong performance in 2006, posting year on year growth of 68%. Corporate Finance delivered exceptional results for 2006 with a number of significant M & A deals, including the Venfin and Kumba transactions.

Structured Finance delivered exceptional growth driven by opportunities in the property, acquisition and leverage finance markets and collaboration with Corporate Finance in the preference share market also produced excellent results. Project Finance is well positioned to take advantage of the considerable opportunities that PPPs present.

WesBank had a very good year with pre tax profits increasing by 25%, extending a period of strong profitability, with annual compound growth over the last three years of 36.5%. Advances grew 24% driven by increased market share and high new business volumes. Total new business written was R50.8 billion, an increase of 28% and included R700 million written in the Motor One Finance business in Australia.

Bad debts increased mainly due to increased consumer indebtedness however they remain within WesBanks long-term target range and interest margins declined due to competitive and funding pressures.

Non-interest revenue showed significant growth, increasing 26%. This was mainly due to the high new business volumes and the increased penetration of insurance products.

WesBank remains a very efficient business with both the cost to income and cost to asset ratios improving.

Momentum
The Momentum Group increased normalised earnings by 23% and grew embedded value by 31%. This performance was mainly driven by buoyant equity markets and the continued success of Momentums distribution model.

New business inflows increased significantly with net retail inflows growing 37% to R7.5 billion due to strong growth from unit trusts and linked products. Recurring premium risk policies continued to show strong growth, whilst sales of recurring premium investment products also increased despite a reduction in retirement annuity sales.

The integration of Sage Group Limited (Sage) into the Momentum Group has progressed well, and the combined agency force increased its contribution to new recurring premium.

Despite the increased new business levels in the local insurance operations, the reduction in fee margins and the investment in the agency force resulted in new business strain, which dampened profit growth. However the value of new business, which represents the present value of expected future profits from new business, increased by 18% to R434 million mainly due to the increased new business volumes. The margin on new business, however, declined from 2.6% to 2.2%.

The asset management businesses, mainly represented by RMB Asset Management, also produced a strong performance. Strong market growth in the institutional business was partly offset by a net outflow of funds, but resulted in higher asset values and consequently higher fees. The business also benefited from positive retail unit trust inflows.

Collaboration with the wider FirstRand Group progressed well. Sales from the two joint ventures with FNB, namely FNB Life in the mass market and Aspire in the middle market increased significantly, mainly due to credit life policies embedded in the banks products.

Discovery had an excellent year delivering strong earnings growth and the declaration of a maiden dividend.

Discovery Lifes performance exceeded expectations mainly due to its leadership position and Discovery Health also delivered good organic growth.

Discoverys US operations, Destiny Health, showed a disappointing performance. Discovery has made the decision that the business model and strategy is not sustainable and must change and is in the process of revisiting its partnership arrangements with Guardian, its distribution partner in the US.

The performance of PruHealth, Discoverys 50% joint venture with the Prudential plc in the UK performed well and PruHealth is well positioned for continued growth.

PROSPECTS

Looking forward the Group believes that South African economic prospects remain positive although the recent interest rate increases will result in increasing bad debts and have a slight dampening effect on consumer credit demand and spending. However anticipated strong public and private sector fixed investment leading up to 2010, together with increased BEE activity and consumption demand, should underpin future growth.

The opportunity going into the 2007 financial year will be to maintain robust organic growth while managing expected increases in bad debt levels said Harris. "Declining margins will continue, and the banks strategy is to focus on winning profitable business at acceptable returns".

Against a background of increased consumerism Momentum is confident of the steps it has taken to address the value for money issue through revised fee structures. Its focus is now on extracting efficiencies from existing operations, improved service levels, and expansion into new markets, such as the joint ventures with FNB, which now include leveraging off the FNB infrastructure into Africa.

"The Group has a portfolio of leading brands each with its own growth strategy added Harris, "and all these businesses are in good shape and well positioned to capture the growth opportunities in their markets."