REVIEW OF OPERATIONS // BANKING GROUP // FNB

FNB AFRICA

The consolidated results of FNB Africa comprise the subsidiaries FNB Botswana, FNB Namibia, FNB Swaziland, FNB Moçambique, FNB Lesotho and since 1 April 2009, the greenfields start up FNB Zambia as well as the support centre in Johannesburg.

Infrastructure

INTRODUCTION

The global economic crisis, particularly the impact of falling commodity prices, had a strong influence on the economies of Botswana and Namibia. Growth in these markets slowed, resulting in increased unemployment and a reduction of foreign currency flows and trade activity. Government spending came under pressure and current account deficits increased.

Strict monetary policies in all the countries have resulted in declining inflation and interest rates, placing pressure on margins, particularly in the second half of the financial year. However, the FNB businesses continued to produce robust profitability, firstly through focusing on maintaining credit quality through the proactive management of the credit books, and secondly, on increasing volumes and non interest revenue.

THE YEAR UNDER REVIEW

FNB Africa

Net income before tax increased 6% for the year to R1 222 million due to strong results from FNB Botswana and FNB Swaziland with moderate growth in FNB Namibia. Continued investment in FNB Moçambique together with the start up of FNB Zambia has, as expected, moderated the overall portfolio performance and this investment in growing FNB’s African infrastructure will continue over the next few years. Service and electronic delivery will remain a focus in order to increase the customer base and drive up volumes and resultant non interest revenue.

Despite a slower demand for credit in the second half of the year, gross advances increased 11% and deposits increased 6% from the prior year. The focus on credit quality resulted in the overall bad debts charge decreasing 9% whilst the non performing loans, as a percentage of advances remained static at 2.5%.

FNB Botswana

The year under review was characterised by mixed economic conditions. During the first half of the financial year, inflation was at an all time high, as a result of rising fuel and food prices and high interest rates. Despite this, general demand for products and services remained high. However, in October 2008 the first signs of economic stress emerged and the second half of the financial year proved to be far more challenging for business.

Buoyed by demand in the first half of the financial year, net income before tax increased 24% (19% in Pula) to R654 million (P538 million) as a result of good margins (particularly in the first six months) as well as increased transactional volumes. The Rand’s weakness against the Pula positively impacted profit growth.

Advances increased 6% (11% in Pula) predominantly on the back of the expanded retail network and deposits grew by 2% (7% in Pula).

In line with the deteriorating economic conditions, the impairment charge increased from 0.5% to 0.9%. This was mainly in the retail market due to job losses in the mining industry. Impairments have recently stabilised mainly due to the bank’s focus on credit quality and some benefits from the slowly increasing demand for commodities.

FNB Namibia

As the largest diversified financial services provider of banking, assurance, insurance, portfolio and asset management, FNB Namibia felt the effects of a slowing economy. Despite the tough operating environment, however, normalised headline earnings (excluding the profits on VISA and Swabou profits in the prior year) increased 7% on the previous year whilst net income before tax decreased 3% to R551 million (this was in part due to the high base created by inclusion of VISA and Swabou profits in the comparative period to June 2008). On the banking side, margin pressure resulted from the declining interest rate cycle. Profitability was also impacted by investment in IT infrastructure and these costs will continue to be felt over the next two years. The decline in world equity markets also had an impact on the capital portfolio of Swabou Life further dampening the Group’s profit growth.

Gross advances increased 14% due to increased utilisation of commercial and corporate lines and deposits increased 6% with continued reliance on wholesale funding demonstrating significant fluctuations due to asset managers moving funds to and from South Africa.

FNB Namibia’s impairments have been low over the past few years and this trend improved despite the difficult economic conditions, mainly due to the ongoing conservative approach by management in the origination strategies as well as the repayment of some sizable exposures from the public sector and the fishing industry which is showing signs of recovery.

FNB Swaziland

FNB Swaziland performed well despite low asset growth and a lacklustre economic environment. Net income before tax increased 28% to R95 million as a result of good margins, a healthy credit book with low impairments and good transactional volumes.

Gross advances increased 5% given the weak demand for credit and borrowers using excess liquidity to reduce their own debt. Deposits increased 47% as a result of good market liquidity, resulting from increased wholesale deposits emanating from pension fund investment repatriation from South Africa as legislated by Swaziland law.

FNB Moçambique

With the focus on expanding the business, substantial investment was made in the branch network with a corresponding increase in staff. This investment phase is likely to continue over the next few years which will constrain profitability in the short term, but create a sound platform for the future. The branch network doubled during the year and good growth in non interest revenue was driven predominantly by sustained transaction volumes and strong foreign exchange commission.

FNB Lesotho

Gross advances in FNB Lesotho increased (off a low base) as the business is expanding market share. A large portion of FNB Lesotho’s deposits are from financial institutions and the customer base is showing significant growth.

FNB Zambia

FNB Zambia commenced operations on 1 April 2009. The business currently has two branches and growing the infrastructure is a priority for the next two years. Significant investment has already been made, including the development of the Hogan core banking system for a multi-currency environment, as well as satellite technology.

NEW INITIATIVES

Opportunities for expansion into East and West Africa are being investigated.

THE YEAR AHEAD

The focus for the year ahead is to manage the current franchises within the context of a tough economic climate with specific focus on:

• stringent credit management and risk monitoring across all the subsidiaries, to ensure robust and sustainable lending portfolios;
• continued expansion of products and services utilising the existing South African product houses and operating platforms; and
• on-going investment in infrastructure in Moçambique and Zambia.