Group overview

FirstRand Banking Group

The FirstRand Banking Group provides customers with a comprehensive
range of products and services according to specific target market segments.

Overview

The Banking Group produced disappointing results under difficult conditions. Attributable earnings of R5,7 billion (-40%), headline earnings of R6,1 billion (-30%) and normalised earnings of R6,1 billion (-31%) were achieved during the year under review.

The Banking Group’s corporate and commercial banking franchises which operate in the primary and secondary markets, produced accept - able 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 legacy portfolios in the investment bank, significantly impacted overall profitability.

A significant increase in impairments

The current financial year proved extremely demanding from a credit management perspective. Consumers remained under pressure from the high interest rate environment in the first half of the financial year, putting strain on consumer affordability and disposable income levels. This had a significant impact on the Banking Group’s retail franchises, with bad debts within these businesses increasing from R4,9 billion to R7,4 billion.

Impairments remained in line with expectations, with the bad debt ratio at 1,81% of advances (retail 2,66% and wholesale 0,62%). Wholesale impairments include R219 million relating to the default of Dealstream, a futures clearing client. In addition, the wholesale lending portfolios started showing signs of stress in certain sectors.

Trading and investment losses

The Group had previously indicated that it expected further market price volatility in the legacy offshore portfolios of RMB’s SPJ Inter - national 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.

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.

Business unit performance

FNB, the commercial and retail bank, performed satisfactory, producing a return on equity of 26% despite normalised earnings decreasing 19%. FNB’s results were negatively impacted by a significant increase in retail impairments and a slowdown in new business. This was to some extent offset by a good performance from the Mass segment, assisted by an increase in revenue generated from transactions and growth in its loan book. The Commercial and Corporate segments continued to perform well, although deposit margins came under pressure in the second half of the financial year due to the declining interest rate cycle. In spite of the challenging environment, and primarily due to stringent cost management, FNB managed to contain its cost to income ratio at 57,5% (2008: 57,3%).

FNB’s Africa operations performed satisfactory increasing normalised earnings 3% to R514 million, although the global economic crisis, particularly the impact of falling commodity prices, had a significant impact on the economies of Namibia and Botswana, its biggest franchises.

RMB, the Group’s investment banking operation, experienced a very difficult year with normalised earnings 49% lower than the prior year. Whilst RMB’s primary market activities (client focused advisory, financing and execution) performed well, its secondary activities (proprietary trading), and the losses incurred in the international legacy portfolios delivered poor performances. The Investment Banking division performed well increasing profits by 7% despite a challenging base set in the previous year. The Fixed Income, Currency and Commodities division had a disappointing second half of the financial year, with profits down 46% from the prior year. The Private Equity division reported profits down 44% from the prior year, notwithstanding three large realisations in the first half of the year, although no realisations were achieved in the second half. The Equities Trading division incurred further losses as it continued to sell down its international positions. In addition, it incurred significant losses on the default of one of its futures clearing clients, during the year.

WesBank, the vehicle finance business, experienced a difficult year with normalised earnings declining 43%, impacted by significant increases in credit defaults in the local lending business and continued contraction of the advances book. New business was negatively impacted by lower demand in both the retail and corporate sectors. Total new business written was 19% down compared to the prior year with both retail and corporate advances declining. During the year WesBank completed the disposal of its MotorOne Finance advances book in Australia at a loss of R203 million.