The financial year to 30 June 2009 has been the most challenging in RMBH’s more than twenty year history.

The operating environment during the year was characterised by negative economic growth, continued market illiquidity and further declines in asset values.

Whilst there are early indications that the global economy has begun to stabilise, the outlook remains challenging. First world/western economies continue to be under severe stress. The unwinding of massive fiscal and monetary stimulus packages, coupled with the rebuilding of balance sheets, will weigh on global demand for a protracted period. It is expected that the eastern economies may emerge with more vigour than the western economies.

The South African economy is still suffering the effects of the cyclically high interest rates of 2008, falling commodity prices, a marked slowdown in exports, as well as declining domestic demand. This has resulted in a significant slowdown in GDP growth. Job losses are increasing and the manufacturing sector is still contracting.

Over the last eighteen months the SARB reduced interest rates by a cumulative 4,5%, resulting in a current prime overdraft rate of 10,5% pa – the same as its low point in the previous cycle. For the Group’s franchises, this is positive in the medium to long term as it eventually results in the reduction of bad debts and nonperforming loans and improved customer affordability levels. However, given the high levels of customer indebtedness that still has to work through the system, the short term impact of the FirstRand Banking Group’s deposits and income from the capital endowments is negative. The benefit of reducing interest rates can therefore only be expected to positively impact earnings in late 2009 or early 2010.

While the performance of our major investment, FirstRand (pro forma normalised earnings down 31%), has broadly been in line with its “big four” banking peers, the outcome achieved is disappointing. This is particularly so, given that the broad negative trends experienced by all participants, was in our case exacerbated by losses from international strategies that we embarked upon. These have since been terminated.

The resultant outcome reported at the RMBH level was:
Year ended 30 June Rbillion   Cents per share   % change  
on prior year  
• Attributable earnings 2,49   207,1   (40) 
• Headline earnings 2,64   219,7   (30) 
• Normalised earnings 2,51   207,9   (30) 

Total dividends payable to RMBH shareholders for the year ended 30 June 2009 amounts to 99,0 cents (2008: 141,5 cents), representing a year-on-year decrease of 30%, in line with the underlying earnings performance.

The precipitous decline in equity markets during the first half of the financial year (JSE All share index -29%) showed signs of stabilising in the second half (+3%). While not immune to these market gyrations, the intrinsic value of the Group’s investment portfolio did, due to its diversification within the broader Southern African financial services sector, reflect some resilience:
  As at 30 June  
Rbillion 2009   2008   % change  
Intrinsic value 30,3   28,4   +7  
RMBH market capitalisation 28,4   25,4   +12  



Predominantly sourced from Southern Africa, our well-diversified income stream is drawn from the full spectrum of financial services:


The significant shifts in relative contributions between years can be ascribed to the impact of the international dislocation on the performance of RMB’s proprietary trading activities, countered by the strong growth in Discovery’s risk assurance and wealth management initiatives as well as the strong performance of OUTsurance’s personal lines business.


At the centre, RMBH has a moderate level of gearing. At the end of June 2009 our borrowings amounted to some R1,3 billion (2008: R1,2 billion), directed largely at the funding raised for the Discovery acquisition in November 2007, funding our commitment to Youi (OUTSurance’s Australian initiative) and the emerging markets portfolio.

At present the only material funding requirement identified for the current year is some R100 million required to support OUTsurance’s international expansion. We do not foresee any further short-term capital requirements from the other companies in which RMBH is invested.

The intrinsic value of the Group’s investment portfolio showed some recovery during the year under review. The values at year end may be summarised as follows:
  As at 30 June  
Rm 2009   2008   % change  
Market value of listed interests      
(Firstrand, Discovery) 27 655   25 790   +7  
Director’s valuation of unlisted interests      
(OUTsurance, RMBSI)  3 457   3 128   +11  
Net funding (781)  (527)  –  
Total intrinsic value   30 331   28 391   +7  
Per RMBH share (cents) 2 509   2 348   +7  

At 30 June 2009 RMBH’s market capitalisation amounted to R28,4 billion or 2 345 cents per share, (2008: R25,4 billion) representing a 6,5% discount (2008: 11%) to the Group’s underlying intrinsic value.


Our practice is to pay out to RMBH shareholders any dividend received from FirstRand. Dividends received from RMBH’s other investments are used to service any funding commitments that we may have at the centre, after which the balance remaining is also paid to shareholders. While FirstRand seeks to structure its dividend policy on the basis of a sustainable long term trend, the current year’s outcome compelled it to reduce its dividend payment by some 32% between years. Notwithstanding that our other investments paid dividends in line with, or exceeding their earnings growth, the overall trend of RMBH’s net dividend receipts reflected that of FirstRand.

Consequently, the Board resolved to declare a final dividend of 45,0 cents per share (2008: 72,5 cents). Such final dividend, together with the interim dividend of 54,0 cents brings the total dividends for the year ended 30 June 2009 to 99,0 cents (2008: 141,5 cents). This represents a year-on-year decrease of 30% and a dividend cover ratio (on normalised earnings) of 2,1 times (2008: 2,1 times).


Economic upheavals, such as that experienced globally (and the consequential knock–on effects flowing through to domestic markets), necessarily calls for reflection as to the appropriateness of and refinement to the Group’s strategies. At present, this debate is particularly pertinent at FirstRand and Discovery.

FirstRand expounds an increased focus on client driven activities rather than proprietary trading or investment activities in both its South African and international operations. In addition the Group’s secondary market activities will link to client activities or leverage the existing primary market positions.

As regards future international expansion, FirstRand’s emphasis will be on establishing client franchises in markets where the Group has a demonstrable competitive advantage as opposed to principle trading activities that are outside the Group’s core business and markets. Consequently:

While “Greenfields” remains FirstRand’s primary entry approach to new markets, it will consider corporate action and the acquisition of appropriate operating platforms in order to accelerate its refocussed expansion strategy.

While it must be said that the environment in which Discovery operates is complex, it remains convinced that this is precisely the right time to pursue growth and expansion successfully. Its central strategy of integration between the foundational Vitality and its other businesses has been very successful. Discovery continues to open pathways for innovation, created by these “integration assets and methodologies”. Given its significant position and unique assets, it is pursuing additional expansion within South Africa and a considerable amount of work has been done on the potential launch of further products in the broader financial sector.

Discovery Health operates in a complex environment marked by continuous regulatory and policy shifts. Due to its size and impact, Discovery Health is committed to building and improving the healthcare system – not for its members alone, but for all South Africans. Its aim is to work with Government in its pursuit of healthcare reform and the implementation of a National Health Insurance System (NHI) to the benefit of all South Africans. Discovery Health is convinced that the NHI will require the constructive and creative co-operation of all stakeholders to make it workable and sustainable. To this end, Discovery will continue to make available its expertise and resources, and will engage positively and constructively.

Discovery will continue to build out its international expansion plans on the basis of partnering in joint ventures with foreign partners. It is exploring a number of new initiatives in this area.


We believe that the operating environment will remain tough for the rest of 2009 with a slow improvement from 2010 as lower interest rates and fiscal stimulus begin to have a positive impact.

The South African economy is still facing significant difficulties. The consumer will remain under pressure in the medium term, despite the recent easing of interest rates, and therefore volumes in the retail segment will continue to be subdued and bad debts will unwind very slowly given the high levels of consumer debt that still exist. House prices are in the near term expected to continue to fall, resulting in lower recovery rates on mortgage security. Wholesale lending portfolios, which have been resilient for a large part of the economic downturn, are now showing signs of stress. Job losses are increasing and the manufacturing sector is still contracting.

At FirstRand these issues, combined with low asset growth and transaction volumes, means that FNB and WesBank’s earnings will remain under pressure. Further mark to market losses on the remaining legacy portfolios in RMB cannot be ruled out and the private equity realisations in the first half of the year to June 2008 will not be repeated in the current financial year. Momentum’s inherently defensive business model due to its diversified product range, strong distribution model, upper-income target market focus, capital efficient liability mix and the conservative investment mandate used to manage Momentum’s capital, will continue to provide protection to earnings.

Against a macro background of subdued economic activity FirstRand believes that top line growth will remain under pressure. However, the Group expects non-performing loans and bad debts to start to unwind in the large lending books such as vehicle finance and mortgages, and that these ratios will start to show improvement in the first six months of the year to June 2010.

Of our other investments, both Discovery and OUTsurance are well positioned in their respective market segments and should continue to extract superior growth therefrom. Their respective international initiatives should also begin to gain traction during the current year.

Given its size in local markets, and the incremental nature of our international strategies, it will be difficult for the Group to track back to previous levels of earnings growth in the short term. However, the Board anticipates that RMBH will over time deliver acceptable real returns to shareholders.

For and on behalf of the Board

GT Ferreira P Cooper
Chairman Chief Operating Officer
16 September 2009