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Financial services giant ready for post-recession world

18 June 2010 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

The last couple of years haven’t been easy for financial services groups, but the latest results from Alexander Forbes (AF), a leading provider of financial, risk and insurance and multi-manager investment solutions internationally, suggests a turnaround

Despite this impressive performance the group posted a 4% decline in operating income from continued operations, from R4.7bn to R4.4bn. Net losses narrowed from R464m to R129m. Alexander Forbes’ management, like most of their financial services peers, had to rely on cost containments and other efficiencies to secure the bottom line post the 2008/9 recession. Group operating costs in the Africa region were only 1% higher for the year to 31 March 2010, an impressive result given average inflation in excess of 6%. And UK expenses, once converted to rand, were 8% lower year-on-year. “In local currency terms, the South African and African businesses showed a marginal increase in operating income of 2%, while the UK businesses remained in line with the previous year,” says AF.

Business as usual

The FY2009 pre-tax loss of R275m morphed into a profit of R93m. This is the ‘base effect’ witnessed at hundreds of locally listed companies (especially those making adjustments to fair values on equity portfolios) as locally listed equities recovered from their March 2009 lows. AF observes: “An assessment of the trading result for the year is therefore much more meaningful as per the segmental report.”

South African businesses are restructuring for post-recession trading conditions. The group says it cannot rely on cost cutting to achieve operational profit in future periods and the challenge will be to grow top line revenues across strategic growth areas. A heavy debt overhang – some R841m following the acquisition of a private equity consortium in FY2009 – has lumbered the group with heavy finance charges. AF has hedged itself against the rising interest rate cycle forecast by most analysts to begin early in 2011.

Feeling the pinch

The group’s risk and service division (AFRIS) stuttered through FY2009 with a 1% improvement in net revenue, to R1.041bn. Management was pleased with the result given the prevailing economic conditions – claiming a delay between recession and its impact on the core broking business. Operational interest earnings in this division plummeted some 22% following repeated rate cuts by the South African Reserve Bank. As a result the trading result from AFRIS fell 2% to R275m.

The group has been rewarded for its innovation in the short-term insurance space. “AF Motor and Household Insurance experienced a significant increase in gross written premiums related to the increase in distribution capacity and the marketing campaign launched in 2009.” And as any insurance company will tell you, ongoing financial success hinges on writing new business! AF also achieved solid results from specialist areas such as Risk Engineering, Metals and Minerals, Financial Institutions and Professions.

The group trading result from its SA Financial Services Division surged 13% to R302m despite the 3% decline in net revenue (to just R1.276bn). Management credits the excellent client retention and strong new business generated at the companies Retirement Fund administration business for the improvement. Members under administration now exceed 1.1 million. This performance was backed by similar performances at the Retail division, Health Management Services division and Alexander Forbes Life.

Volatility impacts investment businesses

AF subsidiary Investment Solutions’ results reflect the tale of two halves in equity markets. “The first half was characterised by overall nervousness and the second half by growing optimism over the state of investment and capital markets.” FY2009 net revenue grew by 1% to R437 million and the trading result improved marginally to R247m. This performance was made possible by fund retention and disciplined cost management. AF is particularly happy with the three year performance of its various investment funds. Over this period “70% of funds were above benchmark, and 97% above median when compared against peers!”

International operations produced solid results despite the financial system turmoil laying much of Europe to waste. Financial Services UK posted net revenues £111.6m (down 1% from the prior year) but still weighed in with an £11.7m trading result, 55% higher than FY2009. Investment Solutions’ UK achieved a 22% improvement in net revenue to £2.8m.

Editor’s thoughts: It seems the majority of South Africa’s financial services businesses are on the rebound. Investment markets, although volatile, will probably provide more stable capital returns through 2010 and 2011. And there’s clearly business to be won. Do you believe financial services companies will carry 2009 business momentum into 2010 and beyond? Add your comments below, or send them to gareth@fanews.co.za

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