NIB - Preliminary Results

Old Mutual PLC 15 February 2001 OLD MUTUAL PLC Nedcor Investment Bank Holdings Limited Preliminary results for the year ended 31 December 2000 Old Mutual plc is an integrated financial services group, based in London, with a substantial life assurance business in southern Africa an international range of businesses in asset management (including unit trusts, portfolio management and stockbroking services), together with businesses in banking and general insurance. Nedcor Investment Bank Holdings Ltd ('NIB'), the South African investment bank, in which Nedcor Limited, the South African banking group has majority control, has today issued financial results for the year ended 31 December 2000. Old Mutual plc ('Old Mutual') has a 53.3% holding in Nedcor Ltd. The full text of the NIB announcement is attached, which has been drawn up in accordance with South African GAAP. The results will be consolidated in Old Mutual's accounts in accordance with UK GAAP. Commenting on NIB's results, Mike Levett, Chairman and CEO of Old Mutual said: 'NIB has established itself as a leading player in investment banking and asset management in South Africa. It is especially pleasing that the company has achieved a 23% increase in EPS in a testing environment for all financial markets.' 15 February 2001 ENQUIRIES: Old Mutual, London Tel: + 44 20 7569 0100 James Poole, Director Investor Relations College Hill, London Tel: + 44 20 7457 2020 Tony Friend Matthew Gregorowski Old Mutual, Cape Town Tel: + 27 21 509 2732 Bruce Allen, Manager, Group Media Communications College Hill, Johannesburg Tel: + 27 11 447 3030 Kim Milnes NEDCOR INVESTMENT BANK HOLDINGS LIMITED Audited results for the year to 31 December 2000 Headline earnings up 23% to R615 million Headline earnings per share up 21% Return on average equity 23% Expense to income ratio down to 35% Financial highlights Audited Audited 2000 1999 % change Income statement Operating income (Rm) 1,182 1,101 7 Operating expenditure (Rm) 419 435 4 Headline earnings (Rm) (1999 Adjusted) 615 500 23 Weighted average number of shares (m) 1,591 1,567 Headline earnings per share (cents) (1999 39 32 21 Adjusted) Diluted headline earnings per share (cents) 37 30 23 (1999 Adjusted) Selected returns Return on average equity (%) 23,3 22,7 Return on average total assets (%) 2,6 2,4 Non-interest revenue to total income (%) 71,9 69,8 Expense-to-income ratio (%) 35,4 39,5 Capital adequacy Shareholders' funds (Rm) 3,203 2,535 26 Total assets (Rm) 25,171 21,469 17 Capital ratio (%) (Bank only) 12,1 12.7 NEDCOR INVESTMENT BANK HOLDINGS LIMITED Audited results for the year to 31 December 2000 Group income statement Audited Audited 2000 1999 Rm Rm % change Interest income 2,465 2,652 (7) Interest expense 2,133 2,320 8 Net interest income 332 332 0 Non-interest revenue 850 769 11 Operating income 1,182 1,101 7 Specific and general provisions 35 61 43 Net income 1,147 1,040 10 Operating expenditure 419 435 4 Net operating income 728 605 20 Income from associated companies 17 8 113 Add: Net capital profit on the disposal and 65 40 restructuring of businesses Less: Supplement to general risk - 40 provision Net income before taxation 810 613 32 Taxation 130 113 (15) Income attributable to shareholders 680 500 36 Headline earnings reconciliation 2000 Adjusted 1999 Rm **Rm % change Income attributable to shareholders 680 500 36 Less: Net headline earnings adjustment 65 - - Headline earnings (1999 Adjusted) 615 500 23 ** Adjusted headline earnings for 1999 has been calculated by excluding the supplement to general risk provision to ensure comparability. NEDCOR INVESTMENT BANK HOLDINGS LIMITED Audited results for the year to 31 December 2000 Group balance sheet Audited Audited 2000 1999 Rm Rm Shareholders' funds 3,203 2,535 Long-term debt 1 1 Deposit, current and other accounts 21,958 18,924 Liabilities under acceptances 9 9 Capital, reserves and liabilities 25,171 21,469 Cash and short-term funds 1,668 805 Other short-term securities 1,795 755 Government and public sector securities 2,498 3,377 Advances and other accounts 18,087 15,827 Customers' indebtedness for acceptances 9 9 Associated companies 58 19 Other investments 975 567 Property and equipment 81 110 Total assets 25,171 21,469 Segmental analysis of headline earnings by business activity 31 December 31 December 1999 2000 % Rm Rm Growth Treasury 118 129 9 Property Finance 17 32 88 Advisory Services 9 33 267 Investments 51 19 (63) Partnerships/Associates 8 17 113 Structured and Project Finance 103 134 30 Capital Account-Endowment 194 138 (29) Capital Account-Value Added - 113 n/a 500 615 23 NEDCOR INVESTMENT BANK HOLDINGS LIMITED Audited results for the year to 31 December 2000 Consolidated statement of changes in equity Ordinary share Non-distributable Distributable capital and premium reserves reserves Total Rm Rm Rm Rm Balance as at 1 January 391 11 1,610 2,012 1999 Issue of new share 429 429 capital Share issue expenses (6) (6) Goodwill written off (400) (400) Currency translation 5 (5) - and other adjustments Income attributable to 500 500 shareholders Balance as at 31 414 16 2,105 2,535 December 1999 Issue of new share 36 36 capital Currency translation (5) (34) (39) and other adjustments Income attributable to 680 680 shareholders Dividend - cash (9) (9) election Balance as at 31 450 11 2,742 3,203 December 2000 Consolidated cash flow statement Audited Audited 2000 1999 Rm Rm Cash flows from operating activities 817 819 Cash receipts from clients 3,248 3,476 Cash paid to clients, employees and suppliers (2,529) (2,726) Dividends received on investments 98 69 Changes in working funds 565 (1,126) Taxation paid (48) (143) Net cash utilised in investing activities (419) (37) Net cash (utilised) / provided by financing activities (52) 313 Net increase / (decrease) in cash and short-term funds 863 (174) Cash and short-term funds at beginning of year 805 979 Cash and short-term funds at end of year 1,668 805 Comparative figures are restated, where necessary, to afford a proper comparison. Percentages are calculated using actual numbers. Chairperson's review The Nedcor Investment Bank Group ('NIB') achieved sound financial results for the 12 months ended 31 December 2000, particularly within an operating environment characterised by low business confidence and the highly competitive financial services sector. The 23% increase in headline earnings and 21% increase in headline earnings per share are particularly pleasing, as NIB's approach of emphasising the quality of assets as a prerequisite for any transaction has not been compromised. Earnings per share were slightly diluted primarily by the issue of ordinary shares to shareholders electing scrip dividends. During the year NIB took further steps to position itself strategically for sustained growth. The business continued to be reconfigured in line with its internationalisation, partnership and outsourcing strategies, as discussed in the Chief Executive's review. Two initiatives are currently being undertaken in the context of NIB's listing - the establishment of an investor relations programme and a strategy to address the lack of liquidity in NIB shares. THE ENVIRONMENT The financial and corporate environments were difficult in 2000. Despite strong global economic growth, international markets performed badly. The collapse of the technology-dominated Nasdaq index in the US and the significant rise in oil prices increased uncertainty and the risks of an economic slowdown in 2001. Rising risk aversion spilled over into emerging markets, limiting capital flows and placing currencies and market valuations under pressure. Most international equity markets suffered losses in US dollar terms in the course of the year. Consequently, the rand experienced periods of significant volatility, falling by over 18,6% against a strong US dollar and by 12,5% against a broader, trade-weighted index during the year. The currency's weakness and higher energy costs negatively impacted on inflation and prevented any further decreases in short-term interest rates after an early cut in January. In this environment domestic equity prices performed poorly, with the JSE all-share index falling by 2,5% in rand terms. Most sectors were weak, although diamond and particularly platinum shares helped to bolster the index. Banking shares posted modest gains, helped by economic recovery and a view that interest rates would ease further. The financial services sector fell dramatically out of favour amid investor concerns about the longer-term prospects of financial services boutique operations. Hopes of an easier monetary policy were dashed periodically by rand weakness, culminating in the Reserve Bank finally increasing the repurchase rate in October. Economic conditions were varied. The weaker rand, firm commodity prices and a strong global economy helped export sectors. However, domestic demand was more subdued. The uncertain environment hampered capital formation, although several large-scale projects were announced as the year progressed. Consumer spending began to recover, aided by lower real interest rates and improving incomes, but consumers were more price conscious, which limited retailer margins. The property sector remained depressed with the exception of strong growth in a few geographic nodes. The higher oil price and the combined effects of increased spending on gambling and cellphones had a disproportionate effect on lower income earners, limiting non-durable goods expenditure. CORPORATE CONSCIOUSNESS NIB believes that it has a wider responsibility to the society within which it operates, and remains committed to attaining meaningful employment equity objectives. The promotion of black and female economic empowerment at all levels throughout the economy is an objective that NIB supports. NEW BOARD MEMBERS During the year the NIB board was further strengthened with the non-executive appointments of Eric Molobi and Richard Cottrell. Mr Molobi is Executive Chairman of the Kagiso Trust Investment Company (Pty) Limited and serves on the boards of a number of leading South African companies. In addition to his knowledge of the financial services industry and corporate South Africa, Mr Molobi's background enables him to guide and facilitate NIB's thrust into empowerment initiatives. Mr Cottrell has served as Chief Executive Officer of the Financial Services Board and was previously Deputy Chairperson and Managing Partner of Coopers & Lybrand. His wealth of experience and sound judgement will be of great value to the company. OUTLOOK The year ahead will produce new challenges. With central and more recently local government elections successfully completed, the focus in the public arena will be on service delivery and the effectiveness of spending. Significant changes to the tax system are to be introduced and government's privatisation programme will gather momentum as the planned initial public offering of Telkom reaches an advanced stage. Domestic spending and credit demand are likely to improve as business confidence returns and interest rates remain relatively stable. Clearly, the key will be the international environment. The expected soft landing in the US should keep exports reasonably firm and imply good capital inflows as foreign investors take advantage of low market valuations and positive growth prospects. By contrast, a hard landing would suggest a weak balance of payments and domestic economy. Rationalisation in the financial services sector will continue in the year ahead and could accelerate due to changes in the regulatory environment. NIB is in a favourable position to pursue opportunities that may arise during this process. CONCLUSION It has been a privilege for me to serve as NIB's Chairperson for the first time in 2000. A leading participant in the South African investment banking market, NIB is also a key contributor to the performance of the Nedcor Group and occupies an important position in the group's long-term strategy. I should like to congratulate Izak Botha, his executive team and the entire NIB staff for their efforts and dedication during 2000. In particular, the warmth with which Izak and his colleagues have welcomed me is sincerely appreciated. In addition, I feel a deep gratitude for all the support that NIB and I have received from the Nedcor Group, particularly Chris Liebenberg, Richard Laubscher, Tony Routledge and Stuart Morris. We are also most grateful for the wonderful cooperation that we are receiving from the regulatory authorities with whom we interact including, in particular, the Office of the Registrar of Banks. I should also like to thank all members of the NIB board for their contribution and guidance and I look forward to serving with them once again in 2001. Chief Executive's review In 2000 NIB continued to deliver on its strategic approach announced at the time of its listing in 1999. Two of the pillars of this approach are the partnership and internationalisation strategies, which were evidenced by the merger of the operations of NIB Asset Management with the South African operations of Franklin Templeton Inc in the third quarter. Furthermore, NIB identified that the ongoing South African business transformation initiatives will continue to provide the financial services industry with significant opportunities. Accordingly, the purchase of a 20% equity stake in Kagiso Trust Investment Company (Pty) Limited, a leading empowerment financial services company, was concluded earlier in the year. Our acquisition of the commercial business of Edward Nathan and Friedland Inc ('ENF') at the end of 1999 has contributed to an enhanced deal flow in the corporate finance area. We anticipate that further benefits from this acquisition will be derived from deal flows across a broader base of NIB's activities during 2001. During the financial year NIB continued to benefit from a diversified income base, which resulted in NIB achieving headline earnings for the year of R615 million. This excludes the net capital profit on the disposal and restructuring of businesses of R65 million in respect of the sale of 50% of the funds management business to Franklin Templeton Inc. The net capital profit was arrived at after the offset of various costs and provisions directly attributable thereto. These results were achieved in an environment of stringent internal adherence to risk philosophies and limits, which will be detailed in our Risk management review included in our annual report. The centralisation of the credit management process that has been in place for some time now has positioned NIB to pursue significant quality asset growth in both the property and corporate environments. In the Corporate Division teambuilding and the recruitment of new skills in Corporate Finance, combined with a stable environment for Structured and Project Finance, have led to another excellent year. This was somewhat dampened by a small loss in Private Equity, which arose from poor returns, particularly on the small capitalisation listed portfolio. All current market value deficits on individual investments in Private Equity are fully provided for, with the remaining portfolio carrying a materially reduced exposure. Impressive contributions were also made by Treasury and Property Finance, supported by NIB's Capital Account operations. NIB continued to manage shareholders' funds on a ring-fenced, standalone arms-length basis, with core activities managed on a fully costed, fully funded, marginal contribution basis. The discrete management of NIB's shareholders' funds has protected NIB from the adverse market contagion that undermined a number of financial services companies last year. This year, for the first time, NIB has adopted a policy of reporting income from shareholders' funds on a segmental basis, being 'Capital Account - Endowment' and 'Capital Account - Value Added'. For practical reasons prior-year comparatives are not available. The 'endowment' element is the relatively risk free return on shareholders' funds invested in cash and other liquid securities. The 'value added' element is the return achieved by shareholders' funds in support of NIB's operations, including offshore activities. Notwithstanding the reclassification of operating income to equity-accounted income as a result of the partnership initiatives implemented in the previous and current year and the offset to some extent by the inclusion of ENF in the current year, operating income still achieved 7% growth. Operating income and expenditure figures included in the results for 1999, when partnership initiatives had been concluded, are now included under equity-accounted earnings in the current financial year. The return on average equity at 23,3% compares with the previous year's 22,7%. The reduction in the income statement charge for specific and general provisions for bad and doubtful advances of R26 million is a positive reflection of an overall improvement in the quality of the NIB Property Division's assets. This improvement results from the division's policy of being very selective in the assets it finances, from the intensive management that is brought to bear at an early stage on all potentially problematic exposures and from the retention of only those advances that meet stringent lending criteria. The ratio of operating expenditure to total operating income continued its positive trend from the previous year's level of 39,5% to 35,4%. The sustainable foreign currency component of the group's headline earnings increased to 21%, compared with the prior year's level of 16%. HUMAN CAPITAL NIB is committed to creating, developing and maintaining an equitable and non-discriminatory culture in an environment that promotes and values openness, human dignity, diversity and superior performance for all its people. It is pleasing to note that the level of staff turnover in all areas was relatively low in a volatile environment. The NIB skills base was further strengthened by significant recruitment in the advisory services area. Employment equity initiatives are well-advanced and our current race and gender complements compare favourably with industry benchmarks. OPERATIONAL ISSUES Revisions to the existing Banks Act and Regulations were implemented during the second half of the year, which will result in significant changes to the current Banks Act reporting requirements. A major project was initiated at NIB to cater for these revised reporting requirements (effective from 1 January 2001). Full compliance of the revised reporting requirements has been achieved by NIB. Compliance with the new minimum provisioning requirements, effective 1 January 2001, has also been achieved. As at 31 December 2000 NIB reflects a capital adequacy ratio of 12,1% (bank only) and 13,5% (group consolidated). A significant development during the year was the implementation of a new domestic treasury system. With the treasury operation now functioning off an integrated back, middle and front-office system, the benefits of streamlined administration and dealer friendliness will enable the operation to increase activity levels and lower risk exposures. NIB is preparing for the application of Accounting Standard 133 with effect from 1 January 2001 which is likely to have an impact on the manner of reporting of financial instruments by financial institutions. Earlier this year a decision was taken to seek an outsourcing partner for NIB's asset management backoffice activities. In achieving this NIB was able to secure a 20% equity stake in FinSource (Pty) Limited, which will lead to a reduced risk profile in the administration of the funds management business. In addition, the outsourcing of NIB's facilities management activities was also achieved through an agreement entered into with Facilities Management Africa Limited ('FMA') with effect from 1 September 2000. PROSPECTS The past year has been one in which NIB significantly improved the quality of its lending assets. With a firmly established infrastructure and skills base in place, and assuming reasonable market conditions, NIB is strongly positioned to sustain earnings growth. Anticipated rationalisation of the financial services sector as a result of tougher economic and regulatory conditions should provide acquisition opportunities, which will be selectively pursued. ACKNOWLEDGEMENTS The success of the year 2000 is attributable to the commitment, enthusiasm and competence of all NIB employees. My thanks go to Michael Katz, our Chairperson, Nedcor Group and other members of the board for their guidance and support over the past 12 months. My gratitude is especially extended to all members of staff for their contributions to NIB's achievements so far. Declaration of dividend Notice is hereby given that a final cash dividend of 12,9 cents (1999: 5,3 cents) per ordinary share was declared on Thursday, 15 February 2001 in respect of the 12 months ended 31 December 2000, payable to shareholders registered at the close of business on Friday, 9 March 2001. Payment will be made on or about Thursday, 19 April 2001. For and on behalf of the board Prof MM Katz Dr IJ Botha Chairperson Chief Executive 15 February 2001 Company Secretary and registered office J S Eisenhammer 1 Newtown Avenue, Killarney, Johannesburg, 2193 Transfer secretaries Mercantile Registrars Limited, 11 Diagonal Street, Johannesburg, 2001 Transfer Secretaries (Pty) Limited, PO Box 2401, Windhoek, Namibia Web site www.nib.co.za
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