Group overview

FirstRand comprises a portfolio of South Africa's leading financial services franchises, the most important of which are First National Bank (retail and commercial banking), Rand Merchant Bank (investment banking) and WesBank (instalment finance).

FirstRand continued to build on its strong first half performance to produce excellent results for the financial year to 30 June 2011:

• achieving normalised earnings from normalised continuing operations of R10,1 billion, an increase of 22% on the previous period; and
• producing a normalised return on equity ("ROE") of 18,7% (2010: 17,7%).

Integrated highlights

With effect from 7 March 2011, RMBH's sole interest is its 33,9% investment in FirstRand, one of South Africa's preeminent banking groups.

FirstRand's vision is to be the African financial services group of choice, creating long-term franchise value and delivering superior and sustainable economic returns to shareholders within acceptable levels of volatility. It seeks to:

• become a predominant South African player focusing on both existing markets and those markets where the business is currently under-represented; and
• further grow the existing African franchise, targeting those markets that are expected to produce above average domestic growth and are strongly positioned to benefit from the trade and investment flows between Africa and Asia, particularly China and India.

These strategies are executed through FirstRand's operating franchises, within a strategic framework set by the group. During the year, FNB, the retail and commercial bank; RMB, the investment bank; and WesBank, the instalment finance business, continued to make good progress against this strategic intent.

Operational performance

FirstRand's operating franchises, FNB, RMB and WesBank, delivered very strong operational performances.

Overall non-interest revenue ("NIR") grew 7% as a result of ongoing customer acquisition and robust transactional volumes at FNB, particularly in electronic channels. WesBank generated strong fee and commission growth and RMB's knowledge-based fee income benefited from good deal flow throughout the year.

Earnings continued to be positively impacted by the significant decrease in retail bad debts (impairment charge down 34% on the previous period), particularly in the large books of FNB and WesBank. The absolute rate of reduction in bad debts flattened in the second half of the year and has now reached a normalised level.

Investment income also contributed strongly, driven by the private equity and resources portfolios of RMB, and profits from the disposal of Visa Inc. shares.

Asset margins benefited from new business repricing across the large lending books, although given the significant size of the in-force advances (particularly in residential mortgages) compared to the current levels of new business, the benefits will take time to materialise. Margins also continued to be impacted by the negative endowment effect on capital and deposits as average interest rates for the financial year were 114 bps lower than the previous period.

Overall FirstRand's group operating expenses reflect good ongoing cost control with costs increasing only 9%.

FirstRand capital position

Given the macro environment, FirstRand seeks to operate at the higher end of its targeted capital levels to ensure balance sheet resilience. Its targeted capital adequacy ratio of 12% to 13,5% needs to be contrasted to the actual FirstRand ratio of 16,5%.

FirstRand has completed a process of assessing current ratios against anticipated deployment, the implementation of Basel III regulatory changes and its ability to generate future capital through earnings. It is of the view that it is currently operating above the appropriate target levels. This can be ascribed to:

• the recent disposal of certain non-core assets, including the group's stakes in VISA Inc. and OUTsurance, has resulted in an excess that is not required for the current expansion strategy and regulatory changes; and
• the group's operating franchises are generating good returns at a time when there is limited opportunity to grow risk weighted assets due to the current economic climate.

The group has declared a special dividend of 70 cents per share due to the disposal of the non-core assets. It is FirstRand's view that as shareholders were invested in these assets through FirstRand, the opportunistic transactions led to the unlocking of shareholder value and this realised value should be returned to shareholders.

Progress with FirstRand's African expansion strategy

The case for investing in Africa is persuasive – economies are strong, political risks have stabilised, and the business climates continue to improve.

FirstRand has a compelling strategy to grow its franchises on the African continent, matched with a highly disciplined approach to protecting shareholder returns. In order to protect its ROE as it builds a presence outside of its core South African operations, FirstRand prefers "greenfields" operations or small rather than significant acquisitions. While this can mean expansion takes longer, potential dilution of returns can be contained. "Bolt-on" acquisitions to existing "greenfields" operations are also preferable, as these can bring additional scale more rapidly.

The group regards domestic market size and potential market growth as early key considerations when identifying priority countries for expansion outside of South Africa. Based on these considerations, Nigeria, Ghana, Tanzania, Botswana, Kenya, Uganda, Angola and Zambia have been identified as the more desirable markets. As these priority countries present different commercial opportunities, FNB, RMB and WesBank pursue differentiated entry strategies, albeit within the group's overall risk appetite and framework. Thus, FNB continues to make significant progress in building out its infrastructure in Zambia and has established a full service banking operation in Tanzania, while RMB (which already has a presence in India) has opened representative offices in Kenya and Angola to benefit from investment and trade flows between these countries and India.

For an indepth review of FirstRand's performance, RMBH shareholders are referred to www.firstrand.co.za.