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RMBH Results

11 March 2009 RMBH

“At present world financial markets are a bleak and hostile place….during these extraordinary times of uncertainty, it is best to remain cautious, circumspect, wary as well as chary… ”

GT Ferreira – Chairman


RMBH (market capitalisation at end December 2008 of R31,1 billion) holds strategic investments in a portfolio of leading financial services franchises in South Africa, viz.-

· banking and insurance group FirstRand (30%);

· health and life assurer Discovery (25%);

· personal lines insurer OUTsurance (59%);

and

· specialist insurer RMB Structured Insurance (77%).

FINANCIAL HIGHLIGHTS

In what Chairman GT Ferreira describes as “An extremely challenging business environment with the most difficult financial market conditions in living memory…” RMBH’s portfolio of financial services businesses produced a mixed outcome for the half year to December 2008.

In line with the market guidance that it gave shareholders at the beginning of December 2008, RMBH reported normalised earnings of R1,4 billion (111,9 cents per share), down 35% on the prior period.

This disappointing outcome was driven by two factors –

§ a 25% decline to R 4,6 billion in FirstRand’s normalised earnings , where its retail franchises (FNB HomeLoans, WesBank) took strain due bad debts arising from the negative consumer credit cycle as well as further losses arising from the investment bank’s (RMB) proprietary and equity trading portfolios; and

§ a R249 million decline in value (2007 : R83 million gain) of a portfolio of listed emerging market financial stocks in which RMBH had invested directly.

The emerging market portfolio, in existence since 2006, had up to October 2008 been profitable, at which stage, in line with other emerging market stocks, it suffered a precipitous decline, losing some 50% of its value. The portfolio has since then shown some stability. RMBH is evaluating both the composition and continued existence of the portfolio.. If the performance of this portfolio is excluded from its results, RMBH’s core operations showed a normalised earnings decline of some 20% between periods.

These factors overshadowed good performances by Discovery (normalised earnings up 19% at R489 million) and OUTsurance (normalised earnings up 17% at R331 million). Ferreira believes that these outcomes are particularly pleasing, given that both Discovery and OUTsurance had made significant investments in new initiatives during the period.

As all of RMBH’s investments produce strong dividend flows it was able to declare an 2,1 times covered interim cash dividend of some R0,7 billion (54 cents per share), down 22% on the prior period.

OUTLOOK

Against what can only be described as a very challenging backdrop, the greater RMBH group continues to focus on protecting its origination franchises and balance sheets to ensure it is optimally positioned to take advantage of growth opportunities as they arise, particularly as the negative credit cycle reverses.

In the immediate short term, RMBH’s results are likely to be driven by the outcome at FirstRand. FirstRand believes that the earnings of its retail franchises will remain under pressure in the second half of the year. In addition, both local and international markets are likely to continue to experience unprecedented volatility, with the resultant uncertainty that that produces. As a result, FirstRand believes that its performance for the year to June 2009 will be similar to the outcome for the first half. It is anticipated that this outcome will flow through to RMBH.

Ferreira comments, ”The financial world is a very bleak and hostile place with increased volatility being the norm. The macro outlook globally is expected to deteriorate further. South Africans must expect that domestic growth will also slow down, with further job losses and continued declines in asset values being experienced. During these extraordinary times of uncertainty, it is best to remain cautious, circumspect, wary as well as chary, not only in new initiatives that we are seeking to launch, but also in the ongoing day to day management of our existing businesses.”

Quick Polls

QUESTION

SA’s 2025 Budget appears unlikely to introduce major tax hikes, but bracket creep, fiscal debt, and policy uncertainty remain key concerns. What will have the biggest impact on financial planning after the budget?

ANSWER

Bracket creep
Government debt
Laffer Curve effects
Policy uncertainty
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