Old Mutual must learn that South Africans bank for life!
When rumours circulated earlier this week that Old Mutual PLC would flog its 53% stake in Nedbank we did a double take. Clearly the UK-based management hadn’t heard that South Africans stick with one bank for life. We had to wait until the company released its preliminary results for the full year to 31 December 2008 before the rumour was quashed. Instead of taking the ‘non core’ approach that led to such misery for Mutual & Federal, group chief executive Julian Roberts announced that Old Mutual PLC may even extend its stake in the bank through 2009.
The Chief Executive’s Statement is awash with bullish sentiment for South African assets “We now have a firm commitment to all our South African businesses and believe that there is more value that can be achieved through their closer co-operation,” said Roberts. He says Old Mutual PLC will exploit synergies between Old Mutual SA, Nedbank and (to a lesser degree) Mutual & Federal to maximise profit in the region going forward.
Non-core South Africa rocks Old Mutual’s world
The focus on South African operations is not surprising given the group’s disappointing 12-month performance. Old Mutual PLC reported a sharp drop in ‘before tax’ operating profits – with its £1.8bn 2007 profit more than halving to £595m in the latest year. Funds under management declined marginally too, down from £278.9bn to £264.8bn. If we break the result down by geographic region (before finance costs and other special charges) we discover that Europe weighed in with £266m, the United States posted a loss of £270m and other areas chipped in a loss of £17m. The jewel in the crown – South Africa – contributed a substantial £1.191bn to group coffers.
Without the strong operating profit from Old Mutual SA (up 14% to R8bn) and Nedbank (which brought in another R8.8bn) shareholders would have faced an entirely different picture. The South African businesses have survived the credit crisis relatively unscathed – the life insurance outfit boasts 3.8 times more capital than required while Nedbank’s Tier I capital is a healthy 9.6%. Roberts notes that Old Mutual PLC “remains well capitalised with strong surpluses over required capital levels in each of [its] business units…” He admits that “the rapid deterioration [and extreme volatility] in global financial markets, most notably in the fourth quarter, gave rise to an extremely difficult operating environment.” The group’s major difficulty remains its troubled US Life business.
Shareholders will be disappointed with the board’s decision on dividends. After paying an interim dividend of 2.45 pence per share, Old Mutual decided against a final dividend for 2008. And to make matters worse “no dividends will be paid by the company during 2009.” The board wants to “conserve cash and capital during the current period of economic stress!” We were stunned by the initial market reaction to the results. Old Mutual shares surged more than 10% to 637c in early trade. But it seems reality dawned on the long-suffering shareholders later in the day as the counter closed 1.24% down at just 557c. The share is languishing well below its 12-month high of 1974c.
A new savings super group!
There is some promising news in the preliminary results. Old Mutual PLC is aware that its business model needs some fine tuning. The company has undertaken a thorough business evaluation to plot the way forward. Roberts shared the five key focuses in his Chief Executive’s Statement. The first is to “maintain and strengthen Old Mutual’s capital position.” He says the group will build on its healthy capital and liquidity position, though shareholders probably wish the dividend hadn’t been sacrificed as part of the plan.
The second step will be to “streamline the portfolio over time.” Apparently the company’s focus is too broad – with too many countries – too many lines of business – and too many sub-scale market penetrations. Roberts pointed out that the changes wouldn’t happen overnight. And he says “major rationalisation of [group] businesses would be extremely difficult and, if achievable, would almost certainly destroy value for our shareholders” if undertaken in current conditions. So far, the Australian business has been sold and an exit from Portugal negotiated. Operations in Europe have been rationalised and the emerging market operations in India and China downscaled. Its status quo for previously ‘non-core’ Mutual & Federal; but we’d keep a careful eye on future developments in this area.
Stage three of the recovery plan is to “leverage scale in [the group’s] long-term savings businesses. Old Mutual will combine the long-term savings operations at Skandia, Old Mutual SA, the US Life business and Asia Pacific. “We believe that there is a significant amount of value that can be unlocked by these businesses working more closely together,” said Roberts. Paul Hanratty was named as the new London-based head of long-term savings. The fourth step is to “drive value creation within and between our South African businesses.” Old Mutual SA, Nedbank and Mutual & Federal all have a role to play in the group’s future. We believe the textbook ‘synergy’ approach will serve the group better than previous attempts to dismiss these outfits as non-core. And finally – Old Mutual will “strengthen governance and risk management!”
Why quote National Treasury estimates?
We found one of the comments included with Old Mutual’s results rather puzzling. The chief executive opines: “In contrast to the negative forecast GDP in the UK and US, the South African economy is forecast to grow by 1.2% in 2009 (Source: South Africa National Treasury) and, while it is facing its own challenges, the South African banking sector remains in good health, with the inter-bank lending market continuing to operate efficiently.” We hope he realises that Trevor Manuel’s estimates for the domestic economy contradict what’s happening on the ground!
Editor’s thoughts
Old Mutual’s numbers didn’t shoot the lights out; but at least the company posted a profit. What worries us is that the chief executive makes no mention of the massive £11.578bn non-banking investment loss. Although this ‘hit’ is notional and based on changes to fair values of investments, there’s going to be trouble somewhere down the line! Do you think Old Mutual PLC gives enough credit to the South African business? Add your comment below, or send to [email protected]
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