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FirstRand's results as expected in tough markets

15 September 2009 FirstRand

FirstRand Limited today reported year end results for the twelve months to June 2009. Against a very difficult macro background, exacerbated by losses from certain international strategies which have now been terminated, FirstRand’s diverse portfolio of banking and insurance businesses produced a 32% decrease in normalised earnings to R 7.1 billion with a normalised return on equity (ROE) of 14%.

Commenting on the results, FirstRand Limited CEO Paul Harris said

“The Group’s corporate and commercial banking franchises which operate in the primary and secondary markets, produced acceptable performances, as did the retail franchises, despite the difficult consumer credit cycle. However the absolute size of retail bad debts, particularly in the residential mortgages portfolio, combined with the losses emanating from the offshore legacy portfolios in the investment bank, significantly impacted overall profitability.”

“Although the earnings of the insurance subsidiary Momentum are significantly exposed to the equity markets, its diversified business model and conservative capital management contributed towards a positive operational performance.”

Looking forward, FirstRand believes that the tough operating environment will continue for the remainder of 2009 with a slow improvement from 2010 as lower interest rates and fiscal stimulus begin to have a positive impact.

“The South African economy is still facing difficulties. The consumer will remain under pressure in the medium term, despite the recent easing of interest rates, as the excesses created in the previous upward cycle unwind,” said Harris.

“Given the degree of economic recovery envisaged over the next 12 months, we believe that overall top line growth will remain under pressure, although earnings should gradually recover from current levels.

“We have responded quickly to the changes in the macro environment and have implemented the appropriate adjustments to strategy and new business origination. Cost management remains a key focus without compromising on investment for the future. The balance sheet is robust and this will allow the Group’s operating franchises to take advantage of an improving cycle.”

Overview of operational performance

FirstRand had previously indicated that it expected further market price volatility in the legacy offshore portfolios of RMB’s SPJ International division (“SPJi”). For the year under review these portfolios incurred mark to market losses and valuation declines of R775 million. The SPJi business has now been closed down completely and dedicated specialist skills have been allocated to work out the portfolios. The remaining illiquid positions, total around USD224 million at current valuations.

RMB’s Equity Trading division reported losses of R782 million for the year, largely attributable to the continued de-risking of its international portfolios and the default of Dealstream. The international equities legacy portfolio has been written down to approximately USD18 million.

Declining asset growth and further increases in bad debts, combined with the negative impact of faster than anticipated reducing interest rates on capital and endowment balances, also continued to place pressure on the earnings of the Banking Group.

The large retail lending portfolios, particularly residential mortgages and vehicle finance, continued to experience increases in arrears and non performing loans and a slowdown in new business. This negative gearing had a substantial impact on revenue growth and profitability, although the arrears appear to have reached a plateau and post the year end started to show signs of improvement. Stringent credit origination strategies have resulted in better quality of new business written.

FNB’s performance was satisfactory, producing a return on equity of 26% despite normalised earnings decreasing 19%, with its diversified retail portfolio continuing to show good growth in non interest revenue and deposits. The Mass segment performed well on the back of increases in revenue generated strong growth from loan products and also benefitted from the success of its cellphone banking products and services.

FNB’s strong franchises in the Commercial and Corporate segments continued to perform well, although the Commercial segment’s deposit margins were negatively impacted by the endowment effect of reducing interest rates in the second half of the financial year. FNB’s focus on cost management resulted in an increase of only 6% in operating expenses.

The FNB African subsidiaries continued to produce robust profitability, despite a year of meaningful investment in growing the existing footprint and the opening of Zambia. The business was particularly successful at maintaining credit quality and growing volumes and non interest revenue.

RMB’s off shore proprietary trading and investments activities and the losses emanating from the international legacy portfolios negatively impacted profits. The Investment Banking division produced good results despite the challenging base created in the previous year. Corporate activity and lending remained strong and a number of significant deals were concluded, including three large BEE transactions, advising on the sale of assets by BHP Billiton and the Remgro unbundling.

WesBank’s profitability was impacted by significant increases in credit defaults in the local lending business and continued contraction in new business written. However on a rolling six monthly basis, there has been an improvement in bad debts in WesBank’s retail book reflecting improving trends in arrears and better quality recent new business, which is performing well.

Momentum’s diversified product and distribution model provided significant resilience and ensured a positive operational performance. The year was characterised by excellent results from FNB Insurance and solid growth in investment income on shareholders’ funds resulting from the capital preservation strategy. New business volumes also held up reasonably well in the retail and employee benefits businesses. Momentum’s capitalisation level strengthened to a satisfactory 1.8 times the Capital Adequacy Requirement (“CAR”).

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