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FirstRand produces strong top-line growth

27 February 2007 The FirstRand Group Limited

FirstRand Limited (FirstRand), the integrated financial services group, today announced results for the six months ended 31st December 2006.

FINANCIAL HIGHLIGHTS

 Headline earnings    +26%
 Diluted headline earnings per share    +25%
 Normalised earnings    +26%
 Diluted normalised earnings per share +26%
 Dividend per share    +23%
 Normalised return on equity    27.9%  
 Normalised net asset value   +26% 


Commenting on the results, Paul Harris, Group CEO said

"The South African economy has remained strong during the first six months and this, combined with the strength and quality of FirstRands portfolio of brands, has resulted in very strong organic growth across the Group. RMB in particular has outperformed with every one of its divisions delivering strong growth in profits".

OPERATIONAL OVERVIEW BY BRAND
First National Bank - FNB

FNB produced excellent results for the year, with profit before tax increasing 24% to R3.1billion. Its segment strategy continues to be successful, as it facilitates product innovation and differentiation, and as a result all of the segments grew strongly.

Overall interest income grew 29%, as a result of widening margins and strong growth in advances and deposits. Non interest income increased 20% due to growth in customer numbers (up 18%) and transaction volumes. Bad debts increased to 0.8% (2005 - 0.4%) of advances which was expected given the abnormally low arrears and non-performing loans in previous years.

Total advances grew 31%, with most of the growth from the large books of FNB HomeLoans and FNB Card, but also good growth in the Mass segment of 63% (off a low base) and the Commercial segment (+28%).

FNB HomeLoans improved profitability (profits up 26%), on the back of good volumes in new business, widening margins and strong non interest revenue growth of 47%. FNBs stated strategy of focusing on maximising ROE rather than growing absolute market share did result in its market share of new business dropping from 20% to 16%.

FNB Card saw strong growth in advances (+25), customer spend (+19%) and numbers of customers (+17%) however it profits were impacted however by;

 margin pressure on advances as it was unable to re price the interest rate increases under the Usury Act despite the cost of funds increasing;
 increase in bad debts (although these remain within the long run average);
 investment costs associated with the new initiatives with Clicks, Kulula and Vodacom.

In the Mass segment FNB grew its customer base by 240,000 new accounts with cellphone banking contributing significantly. The Smart suite of lending products drove overall advances growth of 65% and whilst FNB currently has a higher level of deposits than advances in this segment it is specifically focusing on lending into this space and believes that the National Credit Act will provide more opportunities to compete with the existing players.

FNB's African subsidiaries all performed well (profit before tax up 27%), delivering both strong top line growth and improving efficiencies.

Rand Merchant Bank - RMB
RMB increased pre-tax earnings 75% to R2 billion with all business units delivering strong growth for the half year. This excellent performance reflects how well positioned RMBs portfolio of businesses is to benefit from a good investment banking environment and can be attributed to the successful execution of certain strategic initiatives:

 providing innovative products;
 maintaining a strong client franchise in local markets; and
 successfully applying trading models and intellectual capital in international markets on an opportunistic basis, leveraging off its local infrastructure.   

Private Equity grew profits 46% to R791million underpinned by good local equity markets which resulted in strong growth in equity accounted earnings and profitable realisations.  Private Equity continued to build its investment portfolio through attractive investment opportunities largely attributable to BEE activity.   

The Equity Trading business delivered an outstanding result, producing 238% growth  with the performance of the offshore arbitrage team, which contributed over 50% of the net result, reflecting the success of its strategy to apply locally derived arbitrage trading strategies to global markets. The joint venture between RMB Securities and Morgan Stanley delivered a strong first half performance. The other trading businesses, interest rates, currency and commodities also performed beyond expectations, both locally and internationally.  

The Offshore division, RMB Resources again performed well driven primarily by very strong prices in particular energy sectors and profitable realisations of investments.

The debt businesses also continued to benefit from positive economic conditions delivering year on year growth in excess of 30% with both Project Finance and Structured Finance benefiting from BEE activity.

Corporate Finance benefited from strong growth in advisory fees from the M&A team. And concluded a number of significant deals including the Kumba restructuring and the Sasol BEE transaction.

WesBank
WesBanks overall profitability was impacted by losses in its international operations. The local business however showed good growth (profits up 14%) despite higher interest rates and pressure on customer affordability levels and this performance reflects the strength of WesBanks market position.

New business production increased 11% to R27.7 billion and although retail new business has started to slow, the corporate market showed good growth. WesBank continued to grow its customer base and market share and remains very efficient improving its cost to income ratio from 48.5% to 46.9%.

The Australian and UK operations, which are in start-up and turnaround phases respectively, showed a loss of R65million. These losses were expected and WesBank believes the operations will achieve profitability in the short to medium term. In Australia the signs are positive with new business prospects and production improving and once turnaround in the newly acquired Carlyle Finance operation in the UK is complete there is significant scope for growth.

Momentum
Momentum benefited from the continued growth in equity markets and the positive impact of recent acquisitions, however overall earnings (+9%) were impacted by three factors:

* investment in new initiatives;
* disappointing performance by the local asset management operations; and
*  the reduction in investment income due to special dividends paid to Firstrand and investment in acquisitions.

Collaboration with FNB continues to show significant growth, generating a threefold increase in operating profit to R49million.  The mass market initiative continues to produce solid results on the back of good new business volume and margin growth, whilst the middle market initiative is making good progress.

The insurance operations increased operating profit 18% mainly driven by increases in recurring savings product sales, an increase of 75% in sales from FNB collaboration, improved productivity in the agency force and the growth in sales of Momentum products through FNB Financial Consultants. The growth in agency force production, combined with the FNB collaboration has resulted in a more balanced distribution mix.

Overall the asset management operations generated an increase in operating profit of 16% to R149million however the local asset management operations experienced a 16% reduction in operating profit. The positive impact of increased equity markets on fee revenue was partially offset by a reduction in performance fees, the disinvestment of certain portfolios, and certain non-recurring income included in the comparative period.

Discovery
Discovery Group increased its operating profit 40% before investment income, tax and the impact of its BEE transaction. New business grew to a new high of R2.5 billion.

Prospects
Commenting on prospects Harris said:
"Looking forward RMB, FNB and WesBank are very well positioned to benefit from anticipated increased infrastructure spend, corporate capacity building and BEE activity. Although Momentums investment in growth initiatives has slowed earnings growth during the current period, these initiatives are expected to contribute positively to future earnings growth. 

"Barring any unforeseen events the Group remains confident of achieving its growth target of a 10% real return to shareholders."

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