/ 17 September 2008

RMB Holdings reports drop in earnings

Financial services group RMB Holdings has reported a 6% decline in headline earnings per share to 311,7 cents for the year ended June.

Normalised earnings, which the group prefers to use as a benchmark, declined by 11% to 297,5 cents per share.

The group declared a final dividend of 72,5 cents per share compared with 80 cents last year. Together with the interim dividend of 69 cents, this brings the total dividends for the year ended June 30 2008 to 141,5 cents — unchanged from 2007 — and represents a dividend cover ratio (on normalised earnings) of 2,1 times (2007: 2,4 times).

This was the first-ever year-on-year decline in earnings reported by the group, which said that, in the main, it had managed to avoid the contagion arising from the unsettled financial environment.

However, it was unable to isolate the greater group results from a dramatic increase of impairments in its retail lending operations and trading losses of R1,4-billion arising from a particularly severe dislocation in international equity markets.

RMB said that while the negative outcome in its trading portfolios and significant cyclical increases in retail bad debts were dampened by the diversified nature of the FirstRand Group’s portfolio, the severity thereof brought about a 13% decline in its normalised earnings.

Momentum Group demonstrated remarkable resilience in a difficult trading environment, increasing normalised earnings by 20%.

RMB has significant investments in both groups.

The FirstRand Group achieved a normalised return on equity of 22% a year (2007: 29%).

However, the significant increase in interest rates combined with higher inflation placed serious strain on disposable income and eroded household affordability levels. This resulted in a deteriorating consumer credit cycle, which severely affected the banking group’s retail lending activities with bad debts increasing from R2,6-billion to R4,7-billion.

“While the absolute level of bad debts in the year under review highlights the severity of the current cycle, it is not a reflection of structural asset quality issues evident in other markets (eg subprime exposures). However, at the outset the bank did underestimate the overall level to which interest rates would rise,” RMB said.

“At present, FirstRand Banking Group’s bad debt experience is in line with expectations, is correctly priced for and is not out of line with its South African peers,” the group added.

Looking ahead, RMB said it expects that global and local capital markets will continue to see unusually high levels of uncertainty, and conditions for the South African consumer will remain difficult.

“It is anticipated that credit market conditions will continue to be challenging. Factors such as the impact of the recent electricity price increases and the new municipal rates structures currently being introduced will add further pressure to consumers’ cash flow.

“We believe that the South African interest-rate cycle may have reached its peak, but it is difficult to predict or time the end of the current credit cycle. Our group is actively managing its businesses to ensure that they are well positioned to benefit quickly as the cycle improves,” RMB added.

“Of our other investments,” it said, “both Discovery and OUTsurance are well positioned in their respective market segments and should continue to deliver superior growth.

“Given current economic uncertainties we are of the view that it would not be prudent to set narrowly circumscribed growth targets. We do, however, believe that, given the diversified and inherently superior nature of our portfolio of businesses, the group should over the medium term revert to delivering real growth in earnings,” RMB added. — I-Net Bridge