Financial Results

Statement of comperensive income

Figures in Rand		Group 2010		Group 2009
Interest income		65 599 170		55 196 880
Interest expense		-19 724 362		-15 497 772
Net interest income / margin		45 847 808		39 699 108
Fee income		72 618 852		63 544 026
Other microfinance income		15 917 543		5 157 167
Fair value adjustments		138 781 647		24 565 646
Net commission income		1 392 910		16 068 724
Net impairment charge on loans and advances		-27 668 720		-7 745 426
Operating expenses		-189 306 532		-111 368 806
Operating profit		57 610 308		29 920 439
Impairment of goodwill and intangibles		-		-91 237 953
Profit /(loss)on sale of subsidiary		-		-740 059
Excess of acquirers' interest in net assets		3 738 160		-
Profit / (loss) before taxation		61 348 468		-62 057 573
Taxation		-3 150 464		4 376 429
Profit / (loss) for the period		58 198 004		-57 681 144
Other Comprehensive income net of taxation		2 532		-
Foreign currency translation differences for foreign operations		2 532		-
Total comprehensive income / (loss) for the period		58 200 536		-57 681 144
Owners of the company		58 200 536		-60 960 431
Non controlling interest		-		3 279 287
Profit / (loss) for the period attributable to:
Owners of the company		58 198 004		-60 960 431
Non controlling interest		-		3 279 287
Basic earnings / (loss) per share (cents)		16.1		-23.0
Diluted earnings / (loss) per share (cents)		16.1		-23.0
Reconcilliation of headline loss per share
Figures in Rand		2010		2009
Net profit / (loss) attributable to ordinary equity holders of the parent		58 198 004		-60 960 431
Adjusted for:
Exess of acquirer interest in net asset value		-3 214 817		-
Loss on sale of subsidiary		-		636 451
Loss / (profit) on disopsal of property, plant and equipment		14 535		-23 937
Goodwill and intangible impairment		-		78 899 275
Revaluation of investment properties		-119 352 216		-21 143 397
		-64 354 495		-2 592 039
Headline earnings / (loss) per share (cents)		-17.8		-1.0
Diluted headline earnings / (loss) per share (cents)		-17.8		-1.0
Balance sheet at 28 February 2010
Figures in Rand		Group 2010		Group 2009
Assets
Cash and cash equivalents		58 686 238		86 759 323
Other financial assets		6 489 872		11 075 070
Loans and advances		96 174 927		118 574 890
Other receivables		9 107 028		17 571 942
Property, plant and equipment		18 758 228		8 073 375
Investment property		207 000 000		49 599 294
Intangible assets		25 224 686		54 706 804
Goodwill		61 332 358		68 873 709
Total Assets		482 773 337		415 234 407
Equity and liabilities Equity
Share capital and premium		201 708 334		166 117 212
Reserves		5 004 282		38 716 052
Accumulated profit / (loss)		45 738 137		-11 144 128
Non-controlling interest		142 455		20 196 152
Total equity		213 885 288		293 186 096
Liabilities
Trade and other payables		28 338 422		23 214 404
Current tax payable		5 415 620		10 004 357
Finance lease obligation		3 974 258		849 998
Other financial liabilities		164 562 060		145 491 391
Loans from group companies		13 473 281		8 093 589
Deferred Tax		14 416 488		13 695 380
Total liabilities		230 180 129		201 349 110
Total equity and liabilities		482 773 337		415 234 407
Cashflow statement ending 28 February 2010
Figures in Rand		Group 2010		Group 2009
Cash flows from operating activities
Cash receipts from customers		144 882 495		241 329 870
Cash paid to suppliers and employees		-115 723 386		-165 473 909
Cash generated by operating activities		29 159 109		75 855 961
Increase in net loans and advances		-33 335 184		-43 195 548
Interest paid		-17 765 039		-11 707 966
Intrest received on cash and cash equivalents		5 198 381		7 534 017
Taxation paid		-4 987 675		-17 229 109
Dividends paid		-		-23 867 453
Net cash outflow from operating activities		-21 730 408		12 610 098
Cash flows from investing activities
Property, plant and equipment acquired		-8 863 211		-3 976 091
Proceeds on disposals of property, plant and equipment		257 513		1 621 796
Investment properties acquired		-23 707 161		-4 943 949
Increase in loans from / (to) group companies		5 379 692		-
Increase in financial assets		-6 484 302		-2 569 500
Proceeds on loans to staff members		-		-11 911
Expenditure to maintain and expand operating capacity		-33 417 469		-9 855 833
Contingent consideration settled in cash		-		-36 749 776
Business combinations and divisionalisation		-1 514 185		-4 334 735
Expenditure for expansion		-1 514 185		-41 084 511
Net cash from investing activities		-34 931 654		-50 940 344
Cash flows from financing activities
Repurchase of own shares held as treasury shares		-437 087		-
Proceeds received for shares to be issued		-		34 796 119
Finance lease payments		-44 180		-643 915
Funding / other financial liabilities raised		45 638 631		68 159 031
Funding / other financial liabilities (repaid)		-15 176 698		-
Share premium expenses		-991 689		-
Net cash from financing activities		28 588 977		102 311 235
Decrease in cash and cash equivalents		-28 073 084		38 760 793
Cash and cash equivalents at beginning of period		86 759 323		47 998 530
Cash and cash equivalents at end of period		58 686 238		86 759 323

STATEMENT OF CHANGES IN EQUITY

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STATEMENT OF CHANGES IN EQUITY

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Against the backdrop of the post recessionary environment in South Africa, the directors are pleased to present the financial results of the Finbond Group for the year ended 28 February 2010. During the twelve months under review Finbond made good progress despite continued extremely challenging market conditions. This process resulted in a number of achievements and significant developments for the Group:

• Net profit before tax – R61,4 million (up 198.9%)

• Basic earnings per share - 16.1 cents (up 170%)

• Headline loss per share - 17.8 cents (up from 1 cents)

• Return on average equity - 26.1% (up 200.6%)

• Total assets – R482,8 million (February 2009: R415,2 million), (up 16.3%);

• Centralised control, standardised operations and a rebranded 167 branch national network in the South African and African Micro Finance sectors

• Significant enhancements to the Group’s loan sub-system

The twelve month period ended 28 February 2010 has been pivotal for Finbond in terms of its evolving strategy of repositioning itself in the Micro Finance market and exiting of the Mortgage Origination market.

The Group continues to manage for the long term 5 to 10 to 15 years and to invest in infrastructure, people, training, information technology and systems, as well as in 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.

According to the ABSA Capital research South Africa’s recession is officially over with the economy growing by 0.9% quarter on quarter (q/q) Q3, ending South Africa’s first recession in 17 years. While overall GDP grew in Q3, domestic expenditure fell 1.7% q/q , underpinned by a noticeable fall in gross capital formation, a slower q/q decline in household consumption spending and a further contraction in inventory accumulation. However, the government’s ongoing support to the economy in the quarter remained evident through strong government consumption expenditure growth and still robust public sector spending. Although the 2.8% peak-to-trough decline in GDP may look modest compared with experiences elsewhere in the world, nearly one million jobs amongst the formal and informal sectors (about 7% of total employment) have already been lost and Q4 labour indicators do not look promising.

According to Fitch Ratings the financial performance of Micro Finance Institutions are coming under increased pressure from higher impairment charges, linked to a deterioration in asset quality, stagnant loan portfolio growth, higher funding cost and funding and refinancing risks due to current market conditions. In the wake of the recent economic crisis, the microfinance industry is on the verge of a major transformation in 2010. Despite many assurances that the diversity of funding sources to microfinance institutions (MFIs) would shield them from the global economic downturn, it now appears that funding to MFIs could shrink by as much as $2.3 billion this year. According to Neil Lightfoot at Genesis Analytics.“2010 is going to be a year of reckoning for the micro finance industry as microfinance funding which amounted to $15 billion in 2009 will contract by at least 15% during 2010.”.” In addition funding from International Financial Institutions (“IFI’s”) and Development Financial Institutions (“DFI’s”) are also reaching its limits due to counterparty or country exposure limits. The fact that many MFI’s failed or are experiencing extreme liquidity constraints also contributes negatively to a very difficult fund raising environment. Funding constraints will have a significant funding and liquidity impact on many MFI’s and will contribute to increased levels of refinancing risks, particularly for non deposit taking MFI’s dependant on local and international wholesale funding.

Fitch Ratings further points out that MFI loan portfolios are very cash flow generative given their relatively short term nature, which is a big positive in the current environment, by providing an important source of internally generated liquidity. Faced with refinancing constraints MFI’s may need to look to their loan books as a source of liquidity to service maturing obligations. As a consequence lower growth scenarios for 2010 are very likely, falling from double digit growth to single digits or losses and where there are particular funding constraints shrinkage of the book is even possible.

Micro Finance

Total segment revenue from Micro Finance activities, made up of interest, fee and insurance income (portfolio yield) grew 14.5% to R154 million (2009: R134 million).

Micro finance net profit before tax amounting to R7.5 million is net of, and notwithstanding, the following:

• Upfront share option expenses

• Restructuring and retrenchment costs amounting to R2 million (not expected to recur);

• An increase in net loan impairment expenses (refer portfolio quality and bad debts below);

• The effect of opening new branches (term to profitability approximately 6 months) in line with Group strategy amounting to R1,1 million (expected to recur in the short to medium term).

Bad debts experienced during the period deteriorated, with the net impairment loss ratio (total impairment loss to the income statement / average gross loan portfolio [NILR]) reflecting 19.4%, up from 15.9% (5.3% net of the initial impact of placing a value on previously written-off loans) in the prior period. This increase in impairment reflects an overall deterioration in the book as a result of current economic conditions, job losses in the formal and informal sectors, a higher than expected emergence of risk on sales written in the September to December 2009 period and a portfolio sanitisation performed in the aforementioned period. NILR reported in the prior period of 5.3% was net of the initial impact of placing a value on previously written-off loans. These rehabilitated loans are treated as negative bad debts written off in the income statement. The policy regarding rehabilitation of written off loans requires such loans to be performing, with a regular payment profile, before they qualify for reinstatement onto the balance sheet, together with appropriate impairment provisions. Current Group practice is to reinstate rehabilitated loans at their net recoverable value, determined on a discounted cash flow basis.

Total arrears (outstanding loans delinquent by one day or more) to gross loans and advances strengthened to 13.4% (2009: 30.5%). Non performing loans (PaR90 – outstanding loans with arrears over 90 days) to gross loans and advances amounted to 3.9% (2009: 7.2%). This ratio has improved significantly due to improved collections strategies and the portfolio sanitisation performed in Q3 and Q4 of the current reporting period. The portfolio sanitization has the inverse effect on balance sheet portfolio quality ratios opposed to the NILR.

Loan loss reserve, also referred to as the risk coverage ratio (Loan loss reserves [impairment provision]/ PaR90) remains conservative at 134% (2009: 120.3%), which is an indication of a micro finance institution’s ability to cope with estimated loan losses.

The Group continues to follow strict credit criteria upfront, supported by robust collection strategies and processes to achieve improved default rates going forward.

Gross loans and advances organically grew by R33,3 million in the reporting period, after taking the effects of the Blue Chip Finance (BCF1) transaction with minorities and the purchase of the net assets of Moneyline Financial Services into account. Finbond’s debtors book remains geared at lower than one times, well below industry average.

At the end of February 2010 Finbond had R 58,7 million cash in bank and R18 million in undrawn facilities. Although the aforementioned liquidity position seems favourable relative to Finbond’s operations and book size, Finbond is not immune to the funding and refinancing risks that the Micro Finance market is currently experiencing. As a non deposit taking MFI dependant 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.

The agreement which Finbond signed with World Business Capital (“WBC”) regarding the funding transaction with WBC that Finbond announced on 23 February 2010 has not yet closed and funds have not been disbursed yet due to WBC and Finbond’s other major lenders failure to reach agreement on the exact wording of lenders consent’s which WBC insisted on after signing the agreement.

Business Priorities and Strategic initiatives underway include:

• Focus on increased sales of short term product range, specifically 30 day and 90 day products in order to shift book to be predominantly in 30 – 90 days,

• Monitor and drive robust collections of bad debt in all regions;

• Conservative expansion of the branch network in the year ahead, specifically in; Gauteng, Limpopo, the Southern Cape, Northern Cape, North West, Mpumalanga, Namibia and Botswana;

• Further staff training and continued roll out of collections efficiencies, strategies and processes throughout the country,

• Further improvements and enhancements to the Group’s loan management system,

• Stricter lending criteria to improve loan portfolio quality,

• Measures to cut operational cost by 15%,

• National and international fundraising efforts.

Subject to obtaining the required funding Finbond is well positioned for the implementation of its growth and expansion plans in the micro finance market in South Africa and Africa.

Mortage Origination

Total segment revenue declined by 77.5% to R20,9 million (2009: R93 million). Mortgage origination activities reported a decline in net commission income of 91,3% to R1,4 million (2009: R16,1 million).

According to Reserve Bank Statistics in September 2009 mortgage advances growth by monetary institutions tapered off to 4,8% year-on-year (y/y) in September 2009 (5,6% y/y in August), which was the lowest growth rate since February 2000.

According to ABSA’s Senior Analyst Jacques du Toit year-on-year mortgage advances growth is projected to recover gradually from current levels during the course of 2010 on the back of improved economic conditions, filtering through to the household sector and the property market. However, mortgage advances growth is still expected to remain in single digits this year compared with 2009.

Given that Mortgage Origination contributes less than 1% of Finbond’s bottom line (R4,7 million loss in the current reporting period in point of fact) and there is no real sign of any significant recovery, Finbond made the strategic decision to completely exit the mortgage origination market by outsourcing its remaining mortgage origination channels . Effective 1 March 2010 Finbond receives 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

The Finbond board has approved an investment strategy that focuses on:

• strategically positioning Finbond as a Southern African Micro Finance Institution;

• securing additional markets and revenue streams; and

• growing Finbond’s balance sheet.

In the current post recessionary environment numerous opportunities present themselves for the acquisition of assets that are substantially undervalued or where cash strapped institutions or individuals are forced to sell assets at prices far below their market value. Depending on Finbond’s liquidity and cash position it will from time to time exploit these opportunities and will continue to evaluate investment opportunities that will grow its balance sheet.

Investment opportunities must always meet the following criteria:

• the investment must be priced at a significant discount to fair market value; and

• this discount is supported by two independent property valuations.

The following investment properties were acquired in the current reporting period:

• Portion 10,11 and remaining extent of Portion 6 of Farm Zwartkoppies 316 J.T.;

• Portions 28,36,40,66 of Farm Kareekraal 135 J.T.;

• Erf 7/315 and 8/315 Hatfield, Pretoria.

Fair value adjustments, as required by IAS40, based on the valuation placed on investment properties by independent valuators, resulted in a before tax profit of R138,8 million (2009: R24,6 million).

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 the improvement and refinement of management structures, management information and processes. Finbond have also continued to invest management time and money in building the Finbond Micro Finance brand and a unified culture through: improved policy and procedure , Finbond branded clothing for personnel, marketing material, rebranding of branches, revamping of branches, branch infrastructure, improved credit scoring, taxi branding, training of personnel and customers. The result of these initiatives will take time before the effect thereof will be visible in the bottom line performance of the Group, however these improvements have already started to show their worth in respect of quality of management information systems, standardised operating procedures and internal control across the Group.

There remain numerous major 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.

In the year under review The Netherlands Development Finance Company (FMO) again approved a Capacity Development Program for Finbond, which allowed the Group to significantly improve the core loan management system, overall reporting, management information, collections and legal systems, change control, impairment provisioning, automated credit scoring, as well as the seamless integration of the aforementioned.

Challenging Business Environoments

Despite the various major challenges facing Finbond in the current adverse 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 improving the quality of our loan portfolio , stricter lending criteria, decreasing arrears rates, accessing long term funding, optimal capital utilization, reducing operational cost, tighter liquidity management, and improved operational efficiency.

Prospects

The challenging macro-economic environment, in the wake of the worldwide financial crisis and post recessionary environment in 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.

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 and the lack of availability of funding could have a negative impact on the performance of the Group in the year ahead.

We believe that the continued expansion into the Micro Finance market in the implementation of our strategic action plan will ensure that we achieve results in the medium and long term.

Dividend

It is Finbond’s policy to consider the declaration of a dividend annually. Given the current economic climate and the need to protect the Company’s balance sheet, the board of directors has decided not to declare a dividend for the year ended 28 February 2010.

Audit opinion

The auditors, KPMG Inc., have issued their opinion on Finbond’s separate and consolidated results for the year ended 28 February 2010. The audit was conducted in accordance with International Standards on Auditing. KPMG Inc.’s unmodified audit opinion is available for inspection at the company’s registered office.

For and on Behalf of the Board