Right. Good morning, everybody. Let's kick this off. Good morning, and welcome to the presentation of FirstRand's annual results for the year ended 30 June 2023.
We've changed the format of the presentation somewhat, so I'll begin with some macroeconomic slides just to consider the backdrop over the past year.
Right. Just to orientate you, we're starting here with a look at the South African macroeconomic environment. So if we start top left and right, with inflation peaking well above the top end of the target range and the SARB hiking interest rates to levels and at a pace not seen for decades, South African households suffered a real income squeeze over the past financial year.
Ongoing load shedding and other structural constraints, such as failing rail and port infrastructure, added further downward pressure on households and corporate confidence and kept employment growth subdued. Bottom left and right on these graphs, you can see despite these headwinds, the pressing need for more electricity capacity, along with a more enabling regulatory environment, have seen the private sector businesses increasing investment spending at the fastest pace in several years.
This lift in investment spending was accompanied by a healthy pickup in the pace of credit extension to the corporate sector, and we will see that later when we look at RMB's advances.
Right, moving to the U.K., left and top right, the significant policy tightening in the United Kingdom over the financial year, along with the cost-of-living squeeze brought about by the highest inflation rate in decades, have started to weigh on the rest of the economy in the latter part of this financial year. Bottom right, despite a labor market that remained surprisingly robust over the period under review, one of the sectors in the economy where the slowdown has now become quite evident was the housing market, where house prices have started to contract relative to a year ago.
The latest labor market information has also started to reflect signs of a softening in this sector of the U.K. economy. Moving to the region and looking at broader Africa, start at top left. The broader Africa portfolio did not escape this global inflationary trend.
As illustrated in this graph, inflation over the last two years was above that of the previous decade in almost all of the countries in the portfolio. This also resulted in policy tightening in a number of these countries. On the right, inflation was not, however, the only challenge. Sovereign indebtedness weighed on the operating environment in Ghana, which eventually resulted in the government's debt restructuring. High levels of debt and the cost thereof also posed ongoing risk in other countries, such as Nigeria, Mozambique, and Zambia. And then bottom left, the indebtedness constraint was exacerbated by a slowdown in global capital flows towards emerging and frontier economies.
This slowdown was also evident in our broader Africa portfolio, with pressure on capital accounts also reflecting the fall in foreign exchange reserves, and this is acutely noticeable in Nigeria.
Right, I'll now unpack the group's performance for the year to June. Right, the group's performance metrics here on this slide reflect a high-quality result. Normalized earnings up 12% to ZAR 36.7 billion, driven by a strong top-line performance, most notably from the deposit franchise. The credit loss ratio edged up from the half year to end at 78 basis points, printing below FirstRand's through-the-cycle cost of credit range. NAV or net asset value increased 10% year on year, with half of this growth coming from currency movements. Return on equity lifted higher over the year to end at 21.2%, underpinned by a return on assets which edged higher.
Operating leverage at 51.8% benefited from the strong top-line revenue growth, notwithstanding no costs being notably up, printing up 12%.
Operating costs grew well ahead of inflation, and this was a function of headcount growth, normalization of incentives, ongoing investment, and currency effects being the main drivers. We are confident that cost will print far better in the coming year. CET1, or our core equity Tier 1 ratio, declined 70 basis points. to 13.2% following the payment of the special dividend early in the financial year. Given the strong capital position, the board was comfortable to declare a final dividend at the same cover level as was set at the previous year end. On slide 7, we turn to our key performance measure, that being economic profit. So just to remind everybody, this is our accounting profit after subtracting the cost of the capital we used to generate that profit.
You can see economic profit for the year exceeded ZAR 12 billion for the first time, a milestone we are very pleased to have reached. Return on equity, as we said, upper at t he upper end of our target range of 18%-22%. Just turning our attention to net asset value and how this has performed. Our compound growth in net asset value, whilst at the same time maintaining our ROE profile, has delivered significant shareholder value over the years. Right, we've introduced some new material in the in the slide presentation, and this is the first anchor slide that we're gonna be coming back to, a number of times this morning.
Shareholder value and sustainable shareholder value creation in a universal bank boils down to four fundamental themes. In order of importance, they are firstly, gathering deposits.
Secondly, optimizing the risk capital emanating from our lending activities. Thirdly, generating revenues from activities that require less or no risk capital, and to a much smaller degree, being cost-efficient. These themes profoundly impact return on assets. They impact the amount of capital used to generate the return on assets, and ultimately, they drive return on equity. This is how one builds a more valuable bank. I'll use these themes to unpack the group's income statement and balance sheet. Right. So we're on slide 10, and it should be no surprise that liability gathering is the most important. First and foremost, banks are custodians of the savings in a country. It's about trust. This is why the technical name for a bank is a deposit-taking institution. There are very few, few areas in banking where one can truly declare an almost unlimited appetite for growth.
Well-sourced and well-priced liabilities generate non-risk interest income. However, deposit gathering, of course, is not a short-term game. Apart from rewarding customers competitively, it requires a strong and growing customer franchise with good savings propositions that are easy for customers to secure. On slide 11, we see the evolution of the group balance sheet, advances, and the funding side of our balance sheet, and this is since 2013, so over 10 years. You can see here how net interest income, or NII, has shifted, resulting in both an improved risk-adjusted margin, as well as a more diversified source of interest income.
This next slide hones in now on the balance sheet liabilities, and here we're looking at a five-year change to the funding mix, and you can see the very material change in the group's deposits component, rising from 59% to 74%.
Year on year, the deposit franchise grew 14% to end at ZAR 1.44 trillion. The performance from the deposit franchise enabled the decline in the institutional funding component, as you can see, from 33% to end at 19%. Slide 13 shows the performance of the largest deposit gatherer in our group, namely FNB. The left-hand side reveals the 5-year growth for FNB's retail, commercial, and broader Africa businesses. Top right, FNB Retail grew deposits 10% over the year. Pleasingly for us, savings, call, and notice accounts grew impressively as customers secured better earning propositions. This is a trend we hope continues.
Bottom right, FNB Commercial grew deposits an impressive 14%, having surpassed the retail business by deposit volume about 3 years ago. Right.
Not left behind, RMB's corporate transactional franchise continues to scale deposits off the back of ongoing new primary banked clients, both in South Africa and the region. Slide 15 shows the year-on-year performance of the deposit or savings business in Aldermore, up 7% to GBP 15 billion, with growth predominantly coming from personal and business savings. Pleasingly, as you can see on the slide, Aldermore successfully re-entered the wholesale market with their fourth mortgage securitization. It was well-supported and well-priced.
The bulk of the Bank of England TFSME funding is due for repayment in the 2024/2025 financial year. Right, back to our anchor slide. We now move to unpack the next important theme, namely optimizing for the risk associated with lending, investment, and markets activities. These activities require backing with capital, and by far, it's credit risk from lending that consumes the bulk of the Group's risk capital.
Lending judiciously to the right counterparties in the right asset classes and geographies has a material impact on return on assets. Right, on slide 17, we see core lending advances. They grew year-on-year 15% to end at ZAR 1.5 trillion. On the right, we see growth in all segment portfolios, with two notable call-outs. Firstly, RMB's advances grew a robust 21% over the year. Okay, that links back to that, credit extension to the corporate sector, which I mentioned earlier. Aldermore's lending grew 2% in GBP, although this translated into a 23% growth in rand terms, reflecting the depreciation of the rand relative to sterling. All right, first, having a look at retail lending.
So the top two slides, that shows front book retail lending, or if you like, new origination taking place in FNB and WesBank.
You can see that this continues to reflect the tilt towards low and medium-risk customers. This better-rated customer group has more sustainability to withstand the affordability pressure of high interest rates and high inflation. So if you like, the first two slides, the upper two slides, really is the inflow that is going to slowly shape and change the shape of the bottom two slides, and that is total retail books sitting in FNB and WesBank.
You can see here how the two risk distribution graphs show that the retail lending books have migrated over the past 3.5 years, and that continuous decline, if you like, in the component that is coming from high risk. Again, we think this is positioning ourselves structurally for a better credit outlook.
Looking then at FNB Commercial, they grew advances across the board, as you can see on the left-hand side. A notable call-out here for WesBank Corporate, the asset-based lending business, targeting in the main commercial customers, lending there up 20%. Further evidence of the replacement cycle taking place in the business sector. On the right, FNB Commercial front book origination, as well as the total lending portfolio, again, reflecting a pleasing risk picture.
Moving to RMB's advances on slide 20. The growth slowed from the half year, although, as I said, ended up strongly at 21%, with the South African book growing 16% and the broader Africa book growing 39%. Growth, as you can see, was well distributed across sectors. The front book risk distribution on the right-hand side again reflects a well-balanced risk picture. Right, moving to the UK and look at their lending.
Aldermore's total advances growth up 2% in pound terms year-on-year, with growth coming from buy-to-let and motor. Slide 21 reveals the owner-occupied mortgage book. That's a book of circa GBP 2 billion, and you can see that this contracted slightly over the year, given the material rise in borrowing costs, in addition to the cost of living squeeze on consumers. Whilst most mortgages in the U.K. are fixed rate, these are relatively short in duration, and mortgages coming off fixed rates have now reset at materially higher variable rates. This mortgage market refinance theme in the U.K. still has some way to go, and it will extend well into 2024.
Business is keeping a watchful eye on this portfolio for signs of stress. The regional distribution, as you can see on the left-hand side of mortgages, does not highlight any concentrations of concern.
The same conclusion applies to the balance per customer distribution on the right-hand side. The average loan-to-value of the uninsured book, as you can see, is 53%, with almost all balances having a loan-to-value of 85% being fully insured. Looking at the buy-to-let portfolio on slide 22, this portfolio grew 7%, reaching circa GBP 5 billion.
This business lends mainly to professional landlords, often on a portfolio basis, with lower loan-to-values than owner-occupied mortgages. As one would expect, a larger portion of the portfolio would be in the Greater London region, given the higher property prices requiring many to rent rather than buy their accommodation. Once again, the balance concentration and loan-to-value risk distributions reflect careful stewardship of this asset class. Moving on to our asset liability management strategies.
So the management of the group balance sheet is anchored in ALM principles, and this is all managed by group treasury. The group's endowment comprises capital as well as deposit endowment. The question that arises for banks is how these balances should be invested. Should the endowment all be invested overnight? Should it be invested along the yield curve or a combination of these two? FirstRand has chosen to invest the endowment on a consistent, balanced approach.
The aim of this approach is to protect and then enhance earnings and provide the most optimal outcome through an economic rate cycle on a risk-adjusted basis. This is achieved by earning at the term premium from investing along the yield curve for a portion of its endowment.
It's important to judge the success of such an investment program over an economic cycle, and not just in a single year or two. Slide 24 is the proof point of this investment program, and this slide reveals the additional net interest income that has been earned by following this investment approach. The large outperformance in 2021 and 2022 of ZAR 12 billion, relative to an overnight profile, was due to the sharp cut in the repo rate during the pandemic.
Cumulatively, FirstRand has reaped significant benefits to date following this investment approach. As they say, banking done properly is a very long game. One of the outcomes of investing a portion of the endowment is a smoothing out of the interest income that would otherwise follow a much more volatile path of the policy rates, and this slide indicates the point well.
The added degree of stability further allows management to follow a through-the-cycle origination approach when it comes to lending. The slide also reflects the recent narrowing of the gap between the pre and post credit cost margin. And again, this is gonna be a function of two things. One, we think our discerning origination approach over the last couple of years, as well as that outperformance in deposits. This slide then leads us on to consider where we are with credit. Right. The South African combination of higher rates for longer, persistent inflation, lower growth, load shedding, and sovereign risks are impacting consumer and business health.
Despite the operating environment, group credit loss ratio, or CLR, concluded favorably, marginally below the group's TTC range of 80-110 basis points, coming in at 78 basis points.
This beneficial outcome reflects the origination tilt over the past few years. Nevertheless, better-rated customers and, of course, the older back book are not immune from these pressures, and the second half of the financial year saw an increase in payment strain. We saw an increase in debt counseling cases, and we saw new NPL formation, particularly coming from the retail segment. Increased consumer strain is evident at an industry level as well. Strain is also noticeable in the self-employed and small juristic space. Looking forward, credit loss ratios are expected to move well into the TTC ranges, with retail expected to lead the rise. Impairment coverage, as shown on the right-hand side, remains well positioned.
As expected, given the growth in advances which I've covered, credit provisions rose over the year. Coming off a low base, you can see as well, stage distribution deterioration.
Coming back to the anchor slide, the generation of non-credit risk or low credit risk earnings is a very important component to the value creation thesis.
These earnings require relatively less capital. They provide a stream of earnings that fund a portion of operating costs, and furthermore, they add to the credit risk capacity of the bank. A diversified mix also adds additional stability to this non-interest revenue line. Again, these revenues are a reflection of strong customer franchises. Right, slide 28. We see group non-interest revenue coming in a touch under ZAR 54 billion.
Two-thirds of this revenue emanates from the FNB franchise, with the balance coming from RMB and then, to a lesser degree, WesBank. FNB's focus on more customers and more with customers has played out very well this past year. FNB grew customers across all segments and geographies.
Volumes and customer activity also saw very healthy growth. The ongoing fee givebacks, which seems to occur every year, continued again this year, amounting to almost ZAR 400 million. RMB's corporate transactional franchise continued to onboard new customers. Merchant card acquiring grew strongly off the back of higher consumer spend and inflation. RMB's fee generation grew meaningfully as a result of the strong balance sheet activity that I've spoken about, while knowledge-based fees were also very healthy. All right, considering markets and investment income, RMB markets fared much better in broader Africa than they did domestically.
The domestic performance was down year-on-year, the components being equities down 50% on the previous year, lower volumes from both our local and international clients due to the unfavorable macros, and then reduced funding spreads on the back of the MPIF.
To be fair to equities, the base did have an elevated performance from the Naspers process restructure that the business managed to secure in the previous year. Commodities, down 50% on the previous year.
Reduced client hedging activities from the energy sector and the MPIF reform also impacted funding spreads for commodities. Fixed income, flat on the previous year off the back of three successive years of outperformance. And then FX, continuous double-digit growth for the three years in a row, benefiting from additional client hedging activities across all sectors, and a big chunk of that happening in Broad Africa.
RMB private equity, a very welcome chunky realisation coming out of the business, and equity accounted earnings for the remainder of the portfolio were strong. Harry will cover private equity in some more detail. Right, moving on to another exciting business we have.
FNB Life, as you can see on this slide, slide 31, insures 7.3 million customers, and it is now the third largest insurer by debit order in the retail customer base. The business is already a meaningful contributor to total non-interest revenues, now exceeding 10%. The growth in the life premium income of 17% over the past year and 15% CAGR since 2018 is an outcome of healthy sales volume and a solid growth of the in-force book.
The short-term insurance business is scaling fast. Penetration has doubled since 2018, and it is delivering ahead of business case. Premium growth and new business volumes more than doubled on the back of sales of homeowners cover and car insurance products.
The impressive in-force APE, now ZAR 6.8 billion for life and almost ZAR 900 million for the short-term insurance business, bodes well for future income growth. In 2023, the value of new business increased 54% to ZAR 1 billion, with an impressive return on embedded value of almost 35%. Right, back to my anchor slide.
The final component of this thesis relates to operating efficiency. It does, of course, matter to the overall value creation thesis, but not nearly as much as the first three. This year, our operating costs were elevated. I'm confident the rate of growth in these costs will be arrested in the coming year.
Furthermore, now that the bulk of the architecture and plumbing for the contextual data-driven platform has been laid, we are growing in confidence that the operating cost efficiencies of this investment will begin to become noticeable, and Harry will cover costs in some further detail. I've covered the really important components of how to build a more valuable banking and integrated financial services group. These are not new insights to us. They have always been part of the FRM philosophies and practices that we have followed for many years.
These principles are embedded in the performance management framework, and FRM is but one of the important pillars that makes FirstRand distinctive. Moving to capital. This slide now shows the walk of the Group CET1 for the year. Removing the impact of the special dividend, the ratio was flat year-on-year.
Internal capital generation was sufficient to support both the ordinary dividend payments and a significant growth across the portfolio. Risk-weighted asset growth of 16.5% reflects volume and the impact of rand weakness, with the foreign currency translation reserve more than offsetting the impact of the FX movements on RWA. The group's strong CET1 position provides ample resources to support growth ambitions into the next year, with additional capacity being created by ongoing risk-weighted asset optimization. Right, moving to dividends. Given the solid point in time and expected capital position, and this does incorporate regulatory changes.
So this total outlook is an outcome of both ongoing internal capital generation, as well as some of the capital optimization initiatives which we are pursuing.
The board was very comfortable to recommend that the dividend cover be left unchanged at 1.7 times. A final dividend per share of ZAR 1.95 has been declared, with the full year dividend increasing 12% in line with earnings growth. I will now hand over to Harry to take us through the financial review.
Thank you, Harry.
Good afternoon, everyone. Thanks, Alan.
I have the pleasure to give you the year-end results this time around. So Alan has just unpacked the composition effectively of the earnings growth of 12%. I have to say, this is in line with the half-year guidance that we had given, which is operational run rate in the second half will be very similar to that of the first half.
Now, if you stand back, this is actually a very pleasing outcome, given that macros have worsened in the second half. I'll cover most of these metrics in this table along the following slides. A couple of call-outs always. Solid NII outperformance this period, up 19%. It is an impressive performance. It is our key performance measure, and it demonstrates that we pay shareholders first.
Growth in NAV per share, Alan said 10%, notwithstanding the dividend payout last year, and that was a record dividend payout, including the ZAR 7 billion return to shareholders through the special. Half of the growth, as Alan said, is translation reserves emanating from hard currency jurisdictions, but that's especially through our UK operations, which accounted for about ZAR 8 billion increase in the revaluation. We are very particularly proud of the ROE, which remains on the upper end of our range. And yes, that is on the higher 10% capital.
Okay, so this is the incremental move in the income statement. Above inflation cost growth and the credit normalization is more than offset by strong top-line growth. The impact on inflation and the increase in headcount has pushed costs up, which I will cover later.
We have benefited from the lower tax rate, so you can see that here. We have many moving parts in our tax rate, but the most significant is, A, the 1% decline in the SA corporate tax rate, and clearly, private equity also plays its into the tax rate.
Okay, so we move on straight into interest income, and we'll start with the balance sheet growth. Alan shared the deposit franchise remains a star performer, up 14% off a already high base. Now, the core growth in deposits is an impressive ZAR 120 billion. If you include the currency translation reserves for, or the currency conversion, actually, for the UK deposits, this increase is a ZAR 180 billion.
FNB has continued to actively encourage customers to move to more rate-sensitive deposits, hence more of the growth since June is actually in variable rate products. While FNB's ongoing customer acquisition is the underpin to deposit growth, we have noticed that customers have started dipping further into their savings. This behavior is expected, actually, when you consider the stress in the environment.
However, we do expect good growth to continue on deposits. Institutional funding this period has increased, primarily in the debt issuance during the year in order to fund some of the advances growth. Aldermore deposits grew to GBP 15 billion, supporting their advances growth, but also to enhance the bank's liquidity profile, given the uncertain environment in the UK. This slide just unpacks the institutional funding increase.
The group's proportion of institutional funding to that of our deposit franchise still remains low. You can see over the last 12 months, you'll notice that increase in that box. However, when you stand back and look, group treasury still has substantial capacity for funding in this environment. The decline in average term profile is a consequence of the debt security issuances, largely in the shorter-dated NCDs. Moving on to the other side of the balance sheet, advances.
Good advances growth across all products, which you see here. However, the growth since December, as Alan said, has slowed, and this is expected given the pressure on affordability across the sectors. The exchange rate impact is quite significant here as well. It represents 5% of that 15% growth. 2% Aldermore growth actually changes to 23% in rand terms.
RMB ended the year with a healthy increase in advances written across the multiple sectors. Broader Africa and commercial has also driven a very strong advances growth performance. Retail unsecured growth started to normalize off a very subdued level post the pandemic. It's up operationally 10%. If you strip off the run-off profile of the COVID payment holidays, the COVID relief balances have decreased substantially. The growth in balance sheet and customer growth was further supported by the endowment benefit, resulting in overall NII up 16%. As Alan has already covered, the endowment uplift year represents the portion of endowment that is not invested as part of the ALM strategy.
Far left is the lending NII, up 6% on the back of continued advances growth, although at lower margins, which I will cover a bit later.
Far right is the UK operations NII, up 16% in pound terms, as their margins actually widened this period. Broader Africa is benefiting from balance sheet growth and endowment. Margins.
So as mentioned, lending margins came under pressure given the group's origination strategies. This is more than offset by, one, the endowment benefit, both from SA and, and broader Africa, the deposits growth and Aldermore's widening margin.
These drivers resulted in seven basis points increase in the overall margin. Okay, so moving on to impairments for this period. I'll unpack that in detail as well. Let's start with arrears or stage two balances. Now, absolute values, period-on-period increased ZAR 4.8 billion or 4%. Now, these are This is on the, on the bars on the left, the large bars on the left. On the right, the shorter bars, those are operational arrears.
That represents about a third of the balances, and that grew 30%, which is expected given, A, the origination strain of the growth in advances over the last 18 months, and clearly, the effects of the environment. Notwithstanding that increase, some two-thirds, which is the bars on the right-hand side, those represent paying customers sitting in arrears, stage two. Now, that's actually. If you stand back and if you look at the absolute proportion of arrear advances, you will get to the conclusion that it's still low when you overlay the impacts of higher interest, higher inflation cycle.
Now, this is a very good proxy for the group's origination strategies over this period. Next, on to NPLs.
So if you look at the composition, before I get to the product lines, on the left, we split out UK operation NPLs at the bottom from the total NPLs of the group. Excluding the UK, NPLs is up 10%. The NPL trend in the UK is pleasing, given the rate hikes and the cost of living crisis in that market, but the impact of the repricing of fixed mortgages is still expected. When you unpack the growth, top right shows the 9% growth in operational NPLs.
The growth is largely from the origination strain and lower than expected when you overlay that with the operating environment, which again, is a testament to the approach the business has taken to origination. This operational NPLs account for about 80% of our total NPLs.
The other 20% on the bottom actually represent paying NPLs. Those are the ones that paying and have not yet cured. That actually demonstrate significant efforts by the collection team, and as , customers remain under strain. So overall NPLs, 10%, excluding the ZAR devaluation of the UK book. Now, this increase across all products, you can see the increase.
This should not be a surprise to anybody. The group's origination strategies have certainly benefited overall NPL formation. But as Alan mentioned, we must not forget the in-force book, which was originated pre-pandemic, which will show some strain. As Alan covered, over the past 18 months, as the origination strategies gradually aligned to our pre-pandemic appetite levels, NPLs have and will impact accordingly.
Corporate NPLs increase is largely from some larger, secured, highly secured exposures migrating from the watchlist or Stage 2 arrears to Stage 3. These counters were in West Africa and in SA. This will reduce the overall coverage for RMB as well as overall for the group, given that high level of security sitting with those counters. Coverage on all other products actually is not significantly different to prior year. Alan presented the group's credit loss ratio, printing below the group's TTC range. This just gives you the ratios graphically.
Now, the red line, that's despite the steep rate hikes. NPLs as a percentage of advances, those are our bars, have not increased to the same extent, and neither has what you see at the bottom, the cost of risk.
So despite the healthy advances growth and the tougher in macros than anyone expected in the impairment charge, it's at ZAR 11 billion. I want you to go and have a look at 2019 pre-pandemic. ZAR 11 billion is only ZAR 500 million in absolute value above that of the print of June 2019. Now, you would not have expected that given this environment. Again, the testament of the business strategies and significant effort and strong collections by the team.
Now, to analyze that year-on-year increase of ZAR 3.9 billion, you have to look at the bottom left first. It shows the base effect of the net releases of last year. The donut on the right-hand side shows the UK operations, and RMB account for about two-thirds of the ZAR 3.9 increase.
Now, that charge coming from changes in provisions, performing provisions at Stage 1 and Stage 2 provisions year on year. The net increase in charge related to overall NPL activity, when you combine write-offs, recoveries, and the moving provisions, amount to just ZAR 500 million increase this period. So let's have a look at the charge unpacked across some of the large lending books. What is reassuring is that from this data is that majority of the increase in the charge comes from the secured books, which are collateralized.
Top left shows RMB, in particular, had a swing with a net release of bad debts of 14 basis points last year, and this year, a charge of 12 basis points. UK operations charge increased to 59 basis points, understandable given the environment. Retail, secured and unsecured charge is largely emanating from the origination strike.
Unpack the 11% increase in NIR, which represents a couple of things worth calling out: the size and health of our transactional franchise and the level of capital-light revenue streams we are building. Diversity of the group's sources of NIR is demonstrated here. The 8% growth in fee and commission income is commendable. It's a commendable outcome given, A, the prevailing environmental pressures on customers and businesses, the fee givebacks, ZAR 380 million, and also given the pressure of competitive pressure in the environment. Insurance income delivered strong 26% growth. I will cover that in the next slide.
Trading income up 16%. RMB's markets business, which Alan has already covered, and the impact is benefited here from the GBP 26 million one-off fair value gain from Aldermore on the interest rate hedging book.
Unpacking the strong performance from insurance business, driven by the growth in premiums and the benefits of lower claims, the cell captives continue to run off. Those are the darker bars on the bottom right. Life's income is 34% up, supported by the annual premium income of 17%, and also certainly helped by the growth in the credit life portfolio. The return on embedded value, as Alan mentioned, overall is above 30%. Actually, that's quite impressive.
Short-term insurance, as I said, is still in the build-out Phase. In-force premium is up 90%. With the revenue growth, overall profitability in FNB insurance is up 48%. It does include the benefit of the last of the COVID releases of their reserves. RMB private equity earnings up an impressive 82% this period, reflecting the resilient operational performance across most of the portfolio.
It's definitely boosted by the significant equity realization. That's the top bar, the top gray bar. The annuity income is fairly constant despite this realization. Yes, it does benefit from the ZAR 2 billion of new investments this period, but more significantly, it's actually from the performance of the underlying portfolio, characterized by improved profitability in those underlying counters. Some impairments this period, but now with the increased profitability and good investment flows, unrealized value, value in the portfolio stands at ZAR 5.7 billion, marginally down on last year, and that's given the private equity realization. Operating cost, up 12% this period.
Now, staff costs still represents two more than 60, 62% of our total expenses. I'll cover that in the next slide.
Expenses growth reflect the continued investment initiatives and growth initiatives and the significant currency devaluation we've experienced this period, as we do a lot of cost denominated in hard currencies. The investment in platforms and processes continues, and it includes the professional fees. So you can see that investment playing out in the professional fees, also impacted clearly by currency. Similarly, computer costs and, to some extent, the resumed travel costs, which have actually structurally increased post the pandemic.
Aldermore has certainly experienced higher inflationary pressure, pressures in that environment. Cost impacted clearly by that, but this was partly offset by some staff rationalizations done previously. IT cost up 20% this period as a consequence of these investments, and it's across all categories, including staff. So the unpack of this slide gives you what staff cost, up 15%.
So investment in skills to support long-term growth and the long-term growth strategies and inflations has been the major driver of staff growth cost. In addition, the normalization of variable remuneration, both short term and long term, with NII recovery and after three years of failed long-term incentives, the LTIPs, which contributed a lower base last year. To sum up, so the P&L effects outcomes here are mostly within or actually better than expectations, especially the transaction and deposit franchises, which benefits our overall performance.
Operating cost will continue to require more focus, even though with top line this period, supporting that overall cost to income decreases to 51.8%. And you can see this is just a small benefit of cost rationalization. We're using our own internal resources, and we'll see a little bit more of that as we go along.
Ladies, thank you, gentlemen and ladies, thank you very much. I'll now pass over to Alan.
Thank you.
Thank you, Harry.
Right, let's move on to the prospects for FirstRand. Right. So while the macroeconomic cycle for the next 12 months looks more constructive, we think the uncertainty in the global environment and in the regions where we operate remains very high. South Africa and across most of the broader Africa jurisdictions, rates have probably peaked but are only expected to start trending down mid-2024. In the U.K., we expect rates to continue to rise. This environment means corporate advances growth will moderate from current levels, but it's expected to remain resilient. Retail portfolio growth will surely slow on the back of lower demand, although commercial lending is expected to maintain current growth trends. The momentum from the deposit franchise should continue, supporting overall NII growth.
The group's credit loss ratio, Harry's covered in some detail, but in the coming year, we expect to marginally exceed the midpoint of the through-the-cycle range, which is a pleasing performance given the strain consumers and households are feeling at the moment, and it is a testament to the group's judicious origination strategies. South Africa's challenges aside, we remain confident in our strategies, and our progress continues. Our resources are in good shape, our propositions for customers are being received well, and our people are feeling good. While current domestic operating environment remains challenging and momentum is going to slow, we remain confident in being able to grow earnings above nominal, nominal GDP in the year ahead.
FirstRand believes the quality of its operating businesses means it will continue to capture a growing share of profitable growth opportunities in all the segments and markets where it operates, and the group will continue to deliver growth and a superior return to shareholders. With the group's return on equity expected to remain well situated in the target range of 18%-22%. Some thank yous before I end. Once again, our regulators have provided valuable support to our various businesses. For this, we are grateful, and we are thankful. They make us better. Our customers, of course, remain our primary focus, and we are grateful to serve them. Our employees have again, this year, put shoulder to the wheel. We thank them and well done to all of them.
Thank you for your attendance, and we will now open the team up for any questions that you have. Thank you very much. Right.
First
Morning
First thing, James.
Morning, Alan and Harry. Thank you for the opportunity. Just a few questions on Old Mutual, if I may. If you could just touch on the operational performance. I mean, if we strip out the fair value gains, pre-tax profits were down slightly. I know OpEx was up quite aggressively. In the commentary, you also mentioned that at some point, cost of funding is going to roll over. So maybe some comments on how we should think about the evolution of the earnings in that business going forward, please. Thank you.
Do you want to start, Harry?
So, James, thank you very much. So one of the things that impacted them this year, again, is the operational event on the Nostros. So they've taken a further more on the cost line, so that actually mostly actually neutralizes that once-off gain sitting on fair value. So what you see print is largely the operational performance, which is actually quite good when you look at that substantial increase in impairment charge, and most of that is still sitting on the balance sheet, just given where you see on that environment. James, hopefully that covers that. Now, why we're warning about the environment is clearly that repricing of what is it? About 70% of the book is about property book.
That's mainly fixed, and it reprices clearly, probably more than 50% has repriced already, but the impact of that will take some time, and that's what plays out in the provisions.
Thank you, and compliments on the results and on the presentation. Looking at your slide 31, and also, on slide 11, I note a significant effect of market share gains. The question I would like to ask is: How sustainable and whose lunch are you eating? Thank you.
Thank you for the question.
it is a good question, I guess, because the overall banking market is hardly growing, if at all. So if you are growing, I guess it says somebody is giving up some space. I'll make a general comment, and then maybe I think it's down to Jacques and Emrie, maybe just to give a comment from the business side of things, how they're managing to grow and win new customers. So I'll give them some space. I think it is really something we focused on, , this targeting growth.
I guess any business that doesn't grow its customer base and grow a greater share of business with its customers is going backwards. So it's a huge focus area for us. I don't know. Perhaps if we can let the CEO of FNB and the CEO of RMB maybe just give their thoughts on it. It's a very good question. Right, Jacques.
All right, so I want to add just a third one, that there is, there's almost like not what you do, it's also how you do it. So we think the market is tight. I mean, I don't think there's a lot of new participation or new market segments arriving, but it's about fighting that getting more relationships. I think fortunately, we have on many of our innovations that we bring into market, there's still lots of runway. Insurance is an example in the pack today. So we are adding lots of enthusiasm around value prop development, especially as we can build it into a broader client relationship as opposed to just a product line, traditional, , distribution model.
So we think that the way that we package our value propositions is much more to do with our existing clients. That's an amazing opportunity. And if you look at some of the stats in the pack, for example, we now have 1.7 billion odd logins for the year. Now, imagine, , it's almost like the opportunity lies in optimizing every interaction. So traditionally, you would have done, , less of origination or back-office , as we refer to it, and so increasingly, these platform engagements allow us to be targeted with our offerings and to be very crisp at executing that. So I think there's a lot of opportunity still in the base.
It obviously is important to have an origination appetite from a risk perspective, and so fortunately, we're well positioned to still participate in good risk client base opportunities. So we haven't run out of storylines to get the growth going. So at the moment, we're in a good space. And I think from a market, , as the market has sort of gone in a little bit more aggressively and out, if you pivot up and down and much, . So we're trying to keep a very stable outlook at our storyline, so we don't go in and out. , those in and outs are very disruptive for your momentum, especially at scale.
So, we think the way that we've originated calmly and prudently over the last 2-3 years has allowed us to position, , increasingly and get more momentum and stability and confidence as we continue to expand into our base.
Maybe I, I will just add, I think Alan and, and Jacques covered a lot, in particular, the focus on, winning more clients and, and cross-sell, doing more with our clients. I think in the, corporate and investment banking space, in particular, I would say around lending, there are specific strong themes playing out. So, , one would think of sustainable finance and into the private power space, infrastructure funding. So I think that the corporate space across all of our markets are definitely picking up on the levels of activity, in lending.
If there's one page just in the analysis of financial results, just, I guess all banks are going to stand up and, , they will say, well, their propositions are so great, and they're growing customers, and they've got the best brand, and all of these things. We look for hard sort of data points, and I think if you look on page 31 of the analysis of financial results book, there's some really interesting stuff there that the CEO of FNB has just covered.
If I may, your RMB lady, forgive me, I've forgotten your name-
mentioned infrastructure, and I find it interesting that I didn't hear you refer to that. But given the broad program of infrastructure on a broader basis, how do you see the scale of that and your participation in the next couple of years, given the backlog that needs to be addressed?
Again, it's a very good question. I can I mean, I can give you a high road, maybe a sort of a base case, and then, I suppose things could, , not eventuate. I mean, just to your point, I think the high road is very high for us. I think that infrastructure story, and it's a global story. I mean, this, the infrastructure theme is really a global theme. I do think governments around the world, in pretty much most countries, are really running out of two things. They are running out of the capacity to be able to deliver, infrastructure, and other services, and the other thing they're running out of is money.
So if you look at public finances versus the private sector, the savings now sit in many countries, actually in the private sector. The question then becomes, , what is the model that is going to be embraced to really get this infrastructure story going around the world, but very acutely in this country. And as , as a bank, we've been pleading and leading, leading strongly into this theme of, , public-private partnerships, embracing the private sector more and more. There are a lot of conversations going on at the moment around, in particular, logistics and transport. A lot of work is happening. I'm gonna say to you, it's still, for me, still at the, , the planning project excitement stage, , on spreadsheets.
But we've really got to get ourselves, , lined up to deliver. For example, in rail, in port. I mean, there's some promising signs happening around port, but I think we've got a long way to go in rail infrastructure. Have we got capacity? Huge. Huge capacity. And if we , even if we had to fully saturate the capacity of the group, we would have other non-bank platforms, , other ways to get some of this exposure out into capital markets, into pension funds. So I do think the starting point is the domestic savings pool in the country, which includes our pension fund monies in the country. It's a staggering amount of money, actually. The question more is finding investable projects. So we've got a a lot of excitement.
I know Emrie Brown, CEO of RMB, is, and her teams are chasing this stuff strongly. A lot of that balance sheet growth that you saw in RMB, up 21%, , I don't want you to get the impression that's all infrastructure related. Some of it is. A big chunk of it is really this replacement cycle that's been going on in corporate South Africa. For a long time, I guess, replacement had been put off. We're seeing that really pick up. We saw it in WesBank asset-based finance. So that, I guess, is the-- that is a necessary component to really unlock, I guess, the big infrastructure stuff. It's happening, but the pace isn't quick enough.
Alan, we have some questions from the webcast. Stefan Swanepoel asked: "Please, can you comment on the NII growth of 19%? The EPS growth was only 12%. Can you clarify why, in the face of much greater global risks, have you elected to not increase your cost of capital charge? This seems counterintuitive, given deterioration in South Africa, the rest of Africa, with stresses experienced in countries like Ghana, where you've had a write-off of ZAR 498 million, as well as, importantly, a deterioration in the United Kingdom.
Okay, do you want to have a go, Harry?
So Stefan, thank you very much for the question. In fact, I love the question on NII, to be honest, because not many corporates actually show value creation on an economic value basis. So the 19% versus 12, there's a disclosure in the book, but it's effectively only a 10% increase in equity value, so your NAV. So that's the one piece. Your question was, why have we not increased cost of equity? So we have for the forward view, but the first thing is cost of equity isn't a point-in-time metric. , you've got to look at it on a, on a longer-term basis. Generally, you look at it effectively at looking at your 10-year bond rates, et cetera.
So you will not, and should not, take in point-in-time volatility into that, 'cause actually that could be damaging to the business, especially when you are focusing on creating returns that are above the cost of equity. But as I said, next year, if I'm not I mean, probably about 40 bips, if I'm not mistaken, is what we see from 1 July. So clearly, that forward-looking view builds into place. Then if you look at portfolio valuation sitting within, so UK cost of equity. UK cost of equity is also a forward-looking marginal increase. Again, I'm going to quote, like, it's like about 30 bips, but I could be wrong in, in terms of absolute terms. So we see it in the jurisdictions.
On Ghana, to be honest, we're grateful that we actually don't have such a big portfolio size in there, because like I gather you asking, the experience there, it will take some time for us to actually in fact, for the country to actually work through that.
if I could just add
I'll just remind you, the cost of equity is a ZAR base. Sorry, Alan.
is a ZAR base because the way shareholders invest in is, in fact, the rand-based capital.
if I could just add to sort of Harry's comments. I mean, I guess it's not for us to determine the cost of capital. It's for the market to determine the cost of capital. So everybody would have a view on it. All we can say is we have consistently applied a methodology. I think we are clear around how we arrive at that methodology. What we don't do, as Harry says, pick up point-in-time volatilities and change the cost of capital. So as you heard me talking about, and I mentioned it many times today, this through-the-cycle concept, that banking is a long-term game, and so one doesn't have all these knee-jerk reactions to every little data point. So I do think it is there or thereabout. It is, it is, it is
It has a fundamental underpin to the calculation, and it is, there are clear market observable data points. I think the other thing, it is reflective of the overall portfolio. So something like Ghana, if you take the fact that the total broader Africa portfolio maybe contributes 10%, to group earnings, that probably has less than that of group capital. And Ghana then is probably, maybe not even 1% of that 10%. The fact that there's some blowup, in Ghana or restructuring, okay, , the, the, the effect of that on group cost of capital is, pretty much zero. And I think in, if in anything, if you, if you look at the deployment of NAV, particularly to the UK this year-
You see the massive foreign currency translation credit that actually sits, and it, as a component of NAV. What that is implying, if anything, is to tell you from a Rand perspective, the cost of capital should go lower, not higher. Hopefully, we've answered that question.
Thanks. And then we've got two questions from Matthew at Laurium Capital: "Commercial deposits, especially lazy transactional account deposits, remain a key source of funding and earnings for the group. Given the attention the segment is getting from potential competitors, are you concerned about the need to downward reprice your offerings in this market?" Is the first question. And secondly: "In the funeral space, are you seeing significant persistency and lapse pressure?
Okay, perhaps I'll deal with the savings, and then, Mary, you can deal with the insurance one. Just on the savings, I mean, I called that out. Remember when we looked at retail savings, and we showed that current accounts, so you can talk about those are the deposits that sit, I guess, in salary accounts. You would see that they're pretty transitory over a month, so the salary would obviously be credited with the salary early on in the month, and then debit orders and cost of living would erode those balances. Those balances, typical operational balances typically don't attract interest. You can see how little that has grown in retail year-over-year, and how significant the growth has been in savings and call and term deposits.
So what we've been actively driving, and I guess it, it's really an issue when interest rates are high, like they are now. , your retail customer base wakes up, and we actually have woken them up ourselves. We have been targeting propositions. Jacques spoke about those interactions. We use those interactions to encourage customers to shift whatever is a savings balance into a better-earning deposit account. We do it really easily, so it's contextual, it's a simple click, and we encourage it. The other thing we've done this year is that for every current account we open, every salary account that we open, we automatically open a savings account with it. It's not something the customer has to request. It's an automatic. So we create that channel to move savings into accounts where customers get better interest.
So yes, we welcome competition. It's a good environment. We think we are set up well to compete hard on that theme. And anyway, we are pushing it because it's a better outcome for our customers. Okay, Mary.
Okay. So on the funeral business, you said, are we seeing increased lapses? So the short answer is no. I think the lapse experience has been quite consistent. It's been low over a couple of years now, and I guess the funeral business is one that we look at from time to time because it does have a , high churn. But one of the things that we've just recently done is refreshed that product. So we actually think that the customers that take up funeral policies in our base, I think they end up with the right product. When we can see that they don't have the right product, we either upgrade them or we solve for giving them a different proposition.
So I suTppose we don't just sell and then stop and wait for a risk of actually that customer being switched. So it's it's a product that we offer in conjunction with other products, and I think we continuously make sure that the customers are sitting with the right product. And I guess we've been able to grow it in a very healthy way in the last year, and
The lapse experience remains quite low. Thanks.
Thank you. Then, a question from Ross Kritzinger at Investec: "Thanks for the call. With regard to Old Mutual, please elaborate on, one, the large decline in central functions losses with PBT per page 40 of the analysis booklet, and two, the growth in the future, fair value hedge gain, and what the outlook for FY 2024 is for both these items. Also, with regard to Old Mutual, looking at OpEx, should we expect run rate growth over the next few years to remain very elevated, given the multi-year modernization strategy referenced?
Okay, so there's 3 components to the question. Hopefully, I can answer all 3 from memory now. So let's start with the first one, central functions. Central functions actually have the full benefit of the deposits franchise sitting within that. So with the widening of margins, clearly, the profitability is impacted on that. And with the FRM principles, you can see some transmission of cost appropriately into the various asset classes product lines. The second piece is on fair value. So because of this dislocation of the yield curve, you will get that benefit once off. That benefit will pull to par in future, i.e., that credit of GBP 26 million will take a debit flow over Well, I can't tell you what time frame, because it depends on the yield curve, but it will definitely flow into the future. So hence, we're then highlighting it specifically for exclusion.
Melanie, my apologies. Last part of the question, what we expect?
OpEx, if the run rate
Oh, the investment cost. So the investment cost is probably, I mean, for the medium to longer term. So for the short to medium term, you will expect a similar level of investment going on. It's not a big bang project. It's effectively an incremental, continual project into, into the platform. So hence, it's, it's a, it's one of that spend that will continue for a while.
And we don't capitalize, Harry, so we just-
Ah, that's right. It goes to the income statement rather than the balance sheet.
Thanks. The next question from Charles Russell at SBG Securities: "Thanks for the presentation. Please, can you unpack the reasons behind the material drop in Stage 3 coverage? And am I correct in translating your guidance for earnings growth in the 5%-8% range in FY2024?
you can do the first.
So it's a portfolio mix change. So the comment I made about RMB NPLs and effectively highly secured counters moving into that, those will be very lowly provided, the LGD is actually quite low. So that actually changes that. And clearly, the mix change in terms of where we started writing home loans first, you'll see the origination strength in home loans. So it's effectively the securities. If you look at a product level, the coverage at product levels don't materially change, bar the RMB one. Hence, it's effectively just a weighting of mix.
Good. If I can just deal with that, the earnings outlook for us. So the , we let-- what we're not gonna do is give commentary on specific targeted ranges for this next year. What I can say, let's look at it over a three-year period. We talk about our earnings guidance between b- and, and makeup of how do we sort of set some kind of parameters. We talk about real GDP per plus CPI, so let's just say that is more or less nominal GDP. And then we say we would like to outperform that by in a range of 0%-3%. So that is, that's not a target.
Of course, we would like to do much better, but we have to be mindful of the environment we're in, and we also have to be mindful of the absolute size of FirstRand. So, , we're not a, , we're not a start-up, so we are trying to grow off very big numbers. I guess on a three-year basis, let's focus and, , real GDP and CPI, I guess you need to form your own view on what that will be over the next three years. But let's talk about that range of 0%-3%. What I'm gonna say, over a three-year period, in the year coming, we are going to We think we would be at the lower end of that range, okay? The 0%-3%.
We think in the outer 2 years, over 3 year, we think we would accelerate, and hopefully, we exceed the upper end of that range in the outer years. That's how we are looking at it. But I would prefer not to comment on those specific numbers.
Okay, we've got two more left. First, from Chris Stewart at Ninety One: Could you please give an indication of your expectations for weighted nominal GDP for the group across the jurisdictions in which you operate? You talk much better control of costs in F4, FY 2024. FY 2023 was 12.5%. What are you budgeting for 2024?
Okay. Harry, have a go.
Okay, so, Chris, I'll definitely not tell you what I'm budgeting, but I can give you a view as to where you could look at it. So August was salary increases for the staff across the group. Managerial was roughly about 6, non-managerial was roughly just above 7, so weighted, you could probably look at about just 6.6, and 6.5. So somewhere around that, it's probably slightly less than 6.5. So that's already 62% of our cost base comes under that. What you would have seen is some of the other cost items. You'll see across the book, you'll see quite a few with negative items, so those are reductions period-on-period. That's the start of the focus in terms of. Clearly, those will be the lower or tactical cost base.
The structural cost base in terms of property, et cetera, et cetera, will take a little bit of time. So on the fact that 62% is 6% plus, currency devaluation and inflation, let's just say 5-ish, you already get a view that it will be already in the higher single-digit range.
Thanks, Harry. Did you want to talk about the nominal GDP forecasts for the-
The weighted nominal GDP, to be honest, I don't have it. I don't think we even calculate it. We have a nominal GDP per country, so that we can easily do. We can weight it in terms of capital, but we give the capital base there. But in terms of how the earnings growth weighted across that-
Mm
very difficult to do, but, I mean, I'll ask the clever people within the team if they can come up with something.
I mean, just to give you, I mean, our latest sort of house view that I looked at, I think growth, for next year in South Africa, I think we're gonna be lucky if we can achieve 1%. It's gonna be much less for this year, but say in 2024, if we can get to 1%, I think that'll be a That's probably a, a, a pretty decent outcome. I think in 2024 in the U.K., we actually we think growth may well be negative in 2024 in the U.K. And then broader Africa, I, I guess, is gonna be a portfolio story. So but I'm, , we are not in an attractive, growth environment, I think, in the world. So it's, , we're, our approach really is safety first.
At the moment, yes, we're gonna pursue growth where it's attractive, there's good risk-return propositions. But what we're not gonna do is try and manufacture growth where it doesn't exist.
Okay, PJ Prinsloo from Centaur: How do you foresee rate resets impacting Old Mutual? Will the benefit from higher rates offset higher credit losses?
So Old Mutual will have a majority of the book fixed, so now the new fixed book is at effectively higher rates that they priced up. But they do manage, in terms of the ALM process, effectively hedge both sides of that. So the only reason why margins increased this year is because some of the, let's just say, bulk of their products sits in the one-year term mark on deposits. So you see that widening. Clearly, that widening will narrow once the base rate kind of settles down. So I don't think that is the impact in terms of reset of rates. They'll reprice new business as that dynamically happens. But the impact of, as the payment profile of individuals at a higher interest rate compared to what they previously had, that's what we're flagging as risk.
Okay, thank you. I think we're gonna run out of time. Alan, you'll just invite people to lunch.
Good. Are there any more questions here in the room? Anything burning? No. All right. Thank you very much, everybody. Thank you.