Economic environment

Notwithstanding a very challenging year, RMBH reported normalised earnings of R2,5 billion and paid ordinary dividends of R1,2 billion to shareholders.

The operating environment during the year was characterised by negative economic growth, continued market illiquidity and further declines in asset values.

Whilst there are early indications that the global economy has begun to stabilise, the outlook remains challenging. First world/western economies continue to be under severe stress. The unwinding of massive fiscal and monetary stimulus packages, coupled with the rebuilding of balance sheets, will weigh on global demand for a protracted period. It is expected that the eastern economies may emerge with more vigour than the western economies.

The South African economy is still suffering the effects of the cyclically high interest rates of 2008, falling commodity prices, a marked slowdown in exports, as well as declining domestic demand. This has resulted in a significant slowdown in GDP growth. Job losses are increasing and the manufacturing sector is still contracting.

Over the last eighteen months the SARB has reduced interest rates by a cumulative 4,5%, resulting in a current prime overdraft rate of 10,5% pa – the same as its low point in the previous cycle. For the Group’s franchises, this is positive in the medium to long term as it will eventually result in the reduction of bad debts and non-performing loans and improved customer affordability levels. However, given the high levels of customer indebtedness that still has to work through the system, the short term impact on the margins of the FirstRand Banking Group’s deposits and income from the capital endowments is negative. The benefit of reducing interest rates can therefore only be expected to positively impact earnings in late 2009 or early 2010.