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Finbond Group Limited (Incorporated in the Republic of South Africa) (Registration number: 2001/015761/06) Share code: “FGL” ISIN: ZAE00013895 (“Finbond” or “the Company”)  AUDITED RESULTS FOR THE 12 MONTHS ENDED 28 FEBRUARY 2011
Statement of comperensive income
The Group is primarily a financial services provider with significant business interests in the microfinance environment. The Group is organised into three major operating divisions, namely: microfinance, property investment and mortgage origination. These divisions are the basis on which the Group reports its primary segment information for internal purposes. The Group's operating divisions operate in two principal geographical segments/ areas of the world, namely South Africa and Namibia. As the Namibian operations are insignificant in context of Group operations, no secondary segmental information is provided. BASIS OF PREPARATION These Finbond Group Limited (“the Group”) financial results for the year ended 28 February 2011 constitute a summary (prepared in accordance with the JSE Listing Requirements, the South African Companies Act (Act 61 of 1973) as amended, and the recognition and measurement requirements of International Financial Reporting Standards and the presentation and disclosable requirements of International Accounting Standard 34 and the AC 500 interpretation as issued by the Accounting Profession Council of SAICA) of the Group’s audited financial statements. These summarized consolidated financial statements do not include all of the information required for full annual financial statements and should be read in conjunction with the consolidated financial statements of the Group as at and for the year ended 28 February 2011. The accounting policies applied by the Group in these summarized consolidated financial statements are consistent with those applied in the previous year. Audit opinion This announcement has been audited by the Company’s auditors, KPMG Inc., who have expressed an unmodified opinion which is available for inspection at the Company’s registered office. Annual report The Company`s annual report, together with a notice convening the annual general meeting, will be mailed to Finbond shareholders before the end of May 2011, at which time an announcement incorporating details of the annual general meeting will be published on SENS. INTRODUCTION The directors are pleased to present the financial results of the Finbond Group for the year ended 28 February 2011. During the twelve months under review Finbond made good progress despite difficult economic conditions as well as continued challenging market conditions. This process resulted in a number of achievements and significant developments for Finbond:
The Group continues to manage for the long term 5 – 10 - 15 years and to invest in customer focused low cost delivery channels, infrastructure, people, training, upfront credit scoring, unique innovative modern information technology and systems as well as enhanced collection strategies and systems, to build a sustainable, professional business. We believe that doing the right things now, will allow us to reap the rewards in the medium and long term. MARKET CONDITIONS The South African economy recovered in 2010 after the recession of 2009, supported by the global recovery, growing domestic demand, and low inflation and interest rates. Real GDP growth of just below 4% is forecast for 2011. Despite the positive effect of declining inflation and interest rates in 2010, the household sector was plagued by continued job losses in most sectors of the economy up to late last year, while the ratio of household debt to disposable income remained high at just below 79%. ABSA Capital research highlights that “from 26% y/y in Q4 06, private sector credit extension fell to -0.7% y/y in Q1 10 and at present, remains languid at best (5.4% in February 2011). Illustrating the unevenness of growth in the economy, household credit grew to 7.0% y/y in February 2011, while corporate credit measured just 2.7% y/y. Interestingly, while consumer credit is being held back by a mix of demand (indebtedness) and supply (stricter lending requirements), high levels of corporate savings in the economy means companies generally have less need to borrow. Until corporate savings starts to decline and spare capacity has been used up, we do not expect corporate credit to perform strongly. A general improvement in growth metrics through 2011 leaves us expecting private sector credit extension ending 2011 at 10.3% y/y – a welcome improvement from 5.4% at the end of 2010. Unfortunately the same fortunes have not extended to the other two household consumption drivers, deleveraging and employment. Since the start of the rate reduction cycle in December 2008, household debt to income has only fallen slightly (from 81% in 2009 to 78% in 2010) and while a little deleveraging may actually be stimulatory in a cutting cycle (by creating more ‘room’ in consumer pockets for future spending), a still-high household debt ratio will increase consumer vulnerability when the hiking cycle finally commences. At the same time, unemployment remains extremely challenging. Since the peak of employment in Q4 08 (13.8 million jobs) a net 712k jobs have been shed as of Q4 10 which has not only deducted from nominal income but has also weighed heavily on consumer confidence. Even as the government’s New Growth Path places employment creation at the epicentre of policy-making, the landscape remains tricky, largely because wages are settled well-above inflation. This can be a strong deterrent to hiring intentions”. Micro Finance Total segment revenue from Microfinance activities, made up of interest, fee and insurance income (portfolio yield) grew 13,6% (R21 million) to R175 million (2010: R154 million). Value of loans advanced during the year under review grew 7,8% to R 417 million rand. Microfinance net profit before tax amounting to R7,7 million (2010: 7,5 million) is net of, and not withstanding, the following:
Bad debts experienced during the period improved marginally, with the net impairment loss ratio (total impairment loss to the income statement / average gross loan portfolio [NILR]) down to 19.2%,( 2010: 19.4% ) (net of the value placed on rehabilitated loans). This high impairment reflects current economic conditions and job losses in the formal and informal sectors. Non-performing loans (PaR90 – outstanding loans with arrears over 90 days) to gross loans and advances amounted to 8,9% (2010: 3.9%) and again reflects credit risk in the current market and consumer stress. Loan loss reserve, also referred to as the risk coverage ratio (Loan loss reserves [impairment provision]/ PaR90) remains conservative at 94.5% (2010: 134.3%), which is an indication of a Microfinance institution’s ability to cope with estimated loan losses. The Group continued to improve on and apply strict upfront credit scoring criteria, supported by robust collection strategies and processes to achieve improved default rates going forward. Finbond’s debtors book remains geared at less than one and half times, well below industry average. At the end of February 2011 Finbond had R 36,9 million (2010: R58,7 million) cash in bank. In addition, Finbond has R12,6 million in undrawn facilities available as at the end of February 2011. Although the aforementioned liquidity position seems favorable relative to Finbond’s operations and book size, Finbond is not immune to the funding and refinancing risks that the Microfinance market is currently experiencing. As a non deposit taking MFI dependent on development funding from International Development Funders and wholesale funding from local and international Banks, Finbond is particularly vulnerable to funding and refinancing risks in the current environment. Finbond’s loan portfolio is very cash flow generative given the short term nature of our book, which is a big positive in the current environment, by providing an important source of internally generated liquidity. Faced with refinancing constraints we will be able to look to our loan book as a source of liquidity to service maturing obligations if we are unable to raise additional funding in the fourth quarter of the year. Following the Moody’s Credit rating of Finbond and their decision to assign a Ba3.za/NP.za national scale issuer ratings to Finbond Group Limited, we are considering an issue of debt within the debt capital markets in order to refinance existing maturing debt and raise some additional funds for growth. Subject to obtaining the required funding Finbond is well positioned for the implementation of its growth and expansion plans in the Microfinance market in South Africa and Africa. Mortgage Origination Given that Mortgage Origination contributes less than 1% of Finbond’s bottom line (R717000 in the current reporting period in point of fact) and there is no real sign of any significant recovery, Finbond made the strategic decision at the end of the previous financial year to completely exit the mortgage origination market by outsourcing its remaining mortgage origination channels. Effective 1 March 2011 Finbond received 0,01% commission on all transactions originated through its origination channels without having to spend any management time, physical expense or effort on the various channels. Property Investments There was no change to the valuation placed on investment properties in the current period. Two Independent valuations by professional valuers registered with the South African Institute of Valuers were again obtained as at 28 February 2011, as required by IAS 40. The Independent Valuations confirmed the value of Finbond’s property portfolio at R207 million. The directors again draw attention to the risks associated with property investments. Although over the long term property is considered a low risk asset, investors must be aware that significant short and medium term risk factors are inherent in the asset class. Investments in property are relatively illiquid and usually more difficult to realise than listed equities or bonds and this restricts the Group's ability to realise value in cash in the short term. The property valuations in this period have been prepared in a period of market uncertainty. The current turmoil in the world's financial markets has resulted in commercial and residential properties selling in much reduced quantities with virtually little or no market activity in some areas. The lack of market activity and the resulting lack of market evidence means that it is generally not possible to value with as high a degree of certainty as would be the case in a more stable market with a good level of market evidence. The best evidence of fair value is current prices in an active market for similar property investments. In obtaining evidence to support fair value the Group has gone to great lengths and obtained and considered information from a variety of sources. EXECUTIVE OVERVIEW General Overview In the context of this challenging economic and financial environment the Group achieved satisfactory trading results for the twelve months under review, the result of sustained progress in the execution of the Group’s strategy. During the past year, Finbond continued to invest management time and resources into the expansion of it’s low cost distribution network and the improvement and refinement of management structures, management information, information technology systems, biometric customer identification, upfront credit scoring programs and processes and back end collection processes. Through these improvements Finbond aims to differentiate itself in the market by using modern technology in order to deliver simple easy to understand products and services to its target market. The result of these initiatives will take time before the effect thereof will be visible in the bottom line performance of the Group. There remain numerous challenges for Finbond in the short and medium term, not only in respect of the prevailing adverse market conditions, but also relating to the ongoing process of improving the overall effectiveness of the Group to enable it to compete aggressively with its peers. Strategic initiatives during the year under review included:
In the year under review The Netherlands Development Finance Company (FMO) yet again approved a Capacity Development Program for Finbond, which allowed the Group to further improve and develop the core loan management system, overall reporting, management information, collections and legal systems, change control, impairment provisioning, upfront credit scoring, as well as the seamless integration of the aforementioned. Appointments Bo the Board In accordance with the requirements of paragraph 3.59 of the JSE Limited Listings Requirements, shareholders are advised of the following appointments to the board with immediate effect:
It is expected that these appointments will greatly enhance the quality and diversity of management expertise within the Group. Challenging Business Environment Despite the challenges facing Finbond in the current business environment we remain committed to the Group’s principle objective of maximizing shareholder value. Finbond is in the process of building a sound platform and strategic base from which to grow its micro finance operations in South and Southern Africa. The focus for the year ahead will be on further improving the quality of our loan portfolio , stricter lending criteria, decreasing arrears rates, accessing medium and long term funding, growing our loan portfolio, optimal capital utilization, reducing operational cost, tighter liquidity management, and improved operational efficiency. Business Priorities In the year ahead through Courage, Discipline, Commitment, Confidence, Persistence, Passion and a strong Sense of Values we will continue to work hard to realize our vision “To be the leading micro finance institution in South Africa”. After a period of significant branch expansion in 2009 and 2010 our focus in 2011 will be on Finbond being profitable from a branch, regional and national perspective. Our 6 top business priorities in 2011 are to:
CREDIT RATING After conducting their ratings review process, Moody’s decided to assign Ba3.za/NP.za national scale issuer ratings to Finbond Group Limited. According to Moodys Finbond's Ba3.za/NP.za national-scale issuer ratings reflect: “(i) its small size and narrow franchise; (ii) its focus on a high-risk business segment and resultant high level of impaired loans; (iii) its low earnings generating capabilities; and (iv) narrow funding base. The ratings also reflect Finbond's adequate capitalisation and the robust growth prospects of South Africa's microfinance industry. We believe Finbond has a "scale-able" franchise given its nationwide branch network and potential to develop into a banking institution serving the lower income brackets (subject to the relevant regulatory approvals). No external support has been imputed into Finbond's ratings.” Prospects The South African economy is not going to stage a large scale recovery in 2011 and the challenging macro-economic environment, in the wake of the worldwide financial crisis and difficult economic environment in post recessionary South Africa, as well as the adverse market conditions in the markets that Finbond operate in are not expected to abate in the short and medium term. Subject to being able to raise the required funding , given Finbond’s extensive uniquely positioned 189 branch network, current low productivity ratio’s, low average loan size and short term tenure there is room to significantly grow it’s micro finance debtors book in the year ahead. Although the Group is confident that we have the required resources and depth in management to successfully confront the various significant challenges facing Finbond, market conditions in general and specifically higher impairment charges, higher cost of funding, refinancing risks, liquidity risk and the lack of availability of funding could have a negative impact on the performance of the Group in the year ahead. Any reference to future financial performance included in this announcement has not been reviewed or reported on by the group`s external auditors. Dividend It is the Group’s policy to consider the declaration of a dividend annually. Given the current economic climate and the need to protect the Group’s balance sheet the Board of Directors have decided not to declare a dividend for the year ended 28 February 2011. For and on behalf of the Board |
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