Welcome to everyone who's joined us for the first round results presentation for the year ended 30 June. Just a quick recap of the operating environment we're navigating in this period in South Africa. How the rate cycle has played out is probably the most significant macro call-out, particularly as it was worse than we initially predicted, with rates remaining high for a prolonged period. The dotted lines on the graph reflect our baseline expectations for the path of the repo rate over the past three years. I believe the group's origination thesis has somewhat shielded us from the full impact of this unexpected cycle, as we drew back completely from high-risk business and focused on low to medium risk business. We will cover this in more detail later. In the U.K., cost of living pressures were experienced across the economy. Sorry.
While these pressures, such as inflation, eased over the period, rates remain higher than historical levels. That's now for the U.K., and some of the countries within the broader Africa portfolio continued to deal with the implications of difficult structural adjustments. As a consequence, the exchange rate remained under pressure in Nigeria, and inflation remained high, with monetary policy tightening in response. The macroeconomic conditions in the remainder of the broader Africa portfolio started to show improvement from the previous years, with inflation starting to ease and some monetary policy authorities cutting interest rates. In a few countries, we saw a pickup in economic activity as things started to improve. In unpacking our performance, and before I get into the numbers, we did alert the market that we would be raising an accounting provision relating to the regulatory review in the U.K. motor finance sector.
As we explained at the interims, the VAF business in the U.K., Motor Novo, together with the rest of the motor finance sector, is under review by the FCA, which is looking at dealer commission practices. As we have consistently stated, we do not believe that Motor Novo contravened any legislation or regulations, and the cases that have been tested in the U.K. courts support our view, given that more than 70% of these cases have been found in favor of Motor Novo. However, the FCA process creates uncertainty for the year ahead. So in line with other players in the U.K. market, we have raised an accounting provision. Markos will unpack the methodology and data insights we applied in reaching the ZAR 3 billion, which we believe is conservatively struck. On this slide, you can see all our key metrics, including the impact of this provision.
Even including the provision, the group's financial strength and quality of earnings shows up on this slide in a resilient earnings growth number of 4% and an ROE well placed in the middle of our stated range of 18%-22% and solid growth in NAV. It is also demonstrated by the capacity the group has to grow the dividend significantly above earnings growth at 8%, given a high ROE and ongoing capital generation. I believe this is a highly positive outcome, given the provision and the difficult macros across the operating jurisdictions. The group delivered ZAR 10 billion of economic profit on NIACC, which is our key performance measure. The 13% decrease is made up of the provision and the increase in cost of equity from 14.25% to 14.65%, which accounts for the 7% of the 13% decrease.
So overall, shareholder value has been created in a year of managing difficult externalities. This slide builds a bridge between normalized earnings of ZAR 38 billion, including the impact of the FCA review. We have outlined the provision made and actual legal costs incurred in defending the legal cases related to motor commissions and related professional fees. Normalized earnings growth of 10% year on year, excluding these impacts, better reflects the actual underlying operational performance of the business. Slide eleven unpacks the key performance metrics, including the impact, and it really does show an impressive operational performance. In fact, it represents significant outperformance relative to our own expectations at half year, and that cost-to-income ratio in the booklet, the 110 basis points, is should be facing down. Slide 12.
At the interims, we guided for similar earnings growth for the second half, but however, compared to the six months growth to to December 2023, we saw earnings growth of 14% in the six months to June 2024. As shown on this slide, growth, NII growth was a big contributor to the outperformance, mainly produced by RMB. Excellent management, cost management by FNB played a big role, and the U.K. delivered a credit outperformance. Excluding the provision, the group's ROE is close to the top end of its stated range, with NIACC up 6%. I'll be spending some time on a few slides just unpacking what we believe is the recipe, and I think lies in a portfolio that underpins our ability to deliver superior ROEs and ROEs at the upper end of our target range.
We believe that this is resilient and I guess explains why it remains sustainably higher than our peers. Much of this is due to the shape of our business in terms of asset mix, and in particular, the relative size of portfolios that deliver higher risk-adjusted margins, and the relative size of our deposit franchises, which bring with capital-light NII. These are a direct outcome of our FRM process, which ensures disciplined allocation of financial resources to optimize shareholder value. The ROE is also supported by the group's large transactional franchise and diversified sources of NIR. We have built a highly profitable insurance business, and RMB is unique in that it has a long track record in private equity, which has been a consistent generator of high returns for the group. Another niche business that enhances the ROE is the FNB Islamic Banking.
This business has been built over the last couple of years and already accounts for 62% of the Islamic banking deposits in South Africa. It's seen about 28% CAGR in growth rate of the active base, over the last five years. As I've said, the composition of our portfolio and its high returns results from a combination of FRM discipline, strategy, and effective execution. In addition, I think the group has a track record of making big strategic calls that differentiate us and enable us to continue to outperform. I'm going to highlight a few of these calls and demonstrate how they are showing up in our current outperformance. The underlying thesis to the group's decision to focus on growing deposits goes back to 2010, when the group was planning for the liquidity management in the new Basel world.
The group did some deep thinking, and the benefits of a large and stable funding source was identified. Group Treasury worked with FNB to develop compelling savings products anchored to an overall customer proposition, as that is what generates inherent stability and a deliberate objective to properly reward savers. The outcome of this strategy is that FNB today is the number one custodian of retail and commercial deposits in South Africa. The outcome is that deposits have grown faster than advances, resulting over time in a different NII profile to the group's NII since ten years ago. Given the capital-light nature of non-lending NII, this has also been supportive to ROE. An additional benefit is that it's also structurally reduced our cost of funding. Slide 18 reflects FirstRand's approach to managing the endowment profile. We've deliberately...
Instead of rather taking a passive decision, we have taken a decision to actively manage our endowment profile. We took the decision to actively manage the endowment profile to protect and enhance the earnings through the cycle, and we do so by earning the structural term for shareholders, by investing along the curve over and above the repo rate. What this slide shows is that in periods, in prior periods when rates were lower, significant outperformance in NII occurred. In financial years 2021 and 2022 , ZAR 12.3 billion of additional NII was earned when interest rates were low. This year, given higher rates, there was an effective opportunity cost of ZAR 1.5 billion compared to the ZAR 1.1 billion benefit in the prior year, which does have a negative impact on the group's absolute NII growth rate.
However, the group judges the strategy on a through-the-cycle basis, and when the rate cycle turns, we believe the strategy by design will again outperform. Although fee income has remained resilient, thanks to the continued growth in customer numbers and volumes, and despite over ZAR 2.2 billion of fee reductions since 2022, which included about ZAR 1 billion this year, our fee and commission income remains resilient. The resilience of this fee and commission income is testament to FNB's ongoing focus on ensuring that their strong customer value propositions continue to remain relevant and resonate with its customers. The group is cognizant that this revenue line will, over time, come under increasing threats from non-traditional competitors, customer behavior, and regulatory challenges.
This is why we have organically and incrementally been building alternative sources of NII, and our insurance business has been particularly successful and has a high ROE compared to traditional banking and is now contributing 9% of total NII. The insurance business has only so far focused on FNB's own customers, and it will be focusing on developing solutions now for the open market and over the coming year. The group's credit thesis post-COVID has resulted in a credit performance in line with objectives. We took our time to normalize risk appetite as we were cautious to originate into the post-COVID rebound, and our thesis has been anchored to low and medium-risk customers. It's pleasing to see that other than in retail, all portfolios are trending below or at the bottom of their TTC ranges, resulting in a group CLR below the midpoint of our through-the-cycle range.
Retail is outside of initial expectations, given three factors: firstly, the worse-than-anticipated rate cycle, and the systemic weakness in house prices that we've seen over the last two years in South Africa in particular, and thirdly, the increase in debt review inflows. Markos will uncover a little bit more around the shape and the impact of these debt review inflows. Overall, we think that this retail credit experience has been mitigated by the good performance in commercial, in corporate, in the U.K., and broader Africa. I mentioned earlier that we believe our origination tilt has shielded us from higher for longer rates, which has placed consumers under significant pressure. The point I'd like to make on this slide is that the provision release relating to the NOSIA remediation process helped the credit loss ratio by seven basis points.
So 81 would have been 88, and even at that level, it is still below the midpoint of our through-the-cycle range. The slide speaks to our proactive management of all aspects contributing to lending ROE. This, managed through the FRM process and ability to model and measure risk, has allowed us to optimize risk-weighted assets, which has been supportive to the return on assets and ROE. I now turn to unpack our performance, the performance of our franchises against the group's strategic framework. Our market-leading franchises in South Africa still represent about 80% of our group earnings, and we are focused on both protecting and growing the valuable franchises that face increased competition and have been operating in a very tough macros for a long time.
In broader Africa, we are building out a profitable portfolio of businesses, and I'm quite pleased with the progress that's been made here. The U.K. still presents growth opportunities and diversified risk-adjusted growth. The business has also done well in a difficult U.K. economy. Turning to FNB, which has delivered a very resilient performance in South Africa, given the credit pressures that we have discussed earlier. Advances growth was measured and tilted to unsecured, which delivers higher risk-adjusted margins. Residential mortgages still delivered solid growth in a low-demand market. Commercial advances continued to grow as a result of FNB's consistent strategy of targeting specific customer cohorts and sectors, including Islamic banking, agriculture, property finance, as well as specialized finance. SME lending grew 18% year on year, and FNB is now the largest lender in SMEs in South Africa.
The deposit franchise continued to grow off an ever high base, particularly at the top end of retail and commercial. FNB's transactional franchise continued to benefit from growth in new customers and volumes across all digital channels, with banking app volumes still very strong. Overall, fee and commission growth was pleasing, given the almost ZAR 1 billion of reductions in fees in this period. With the introduction of PayShap, FNB reviewed its pricing structures for low-value real-time payments and took the decision to reduce all related fees. We think this is a correct outcome for customers, and we have seen a 34% pickup in volumes since the reductions were implemented. The insurance business also delivered strong PBT growth, with good momentum from FNB Commercial and growth in the short-term insurance business.
Turning to WesBank, I'd like to congratulate the WesBank management team, who have had a strong year. In the face of intense competition, the business has managed to exercise disciplined pricing to protect margins, delivering a solid ROE of 20.9%, a good outcome for balancing growth and returns. New business origination to FNB customers is up to 6%... 60%, up from 40% levels of a few years ago. Advances growth, particularly in the commercial book, benefited from a stronger partnership with FNB Commercial. Disciplined origination and a strong collections effort resulted in a good credit outcome. RMB's diversified portfolio has delivered resilient performance, given the normalization of credit and ongoing investment spend.
The business continues to grow advances on the back of client-focused energy transition strategies and broader infrastructure projects, with ZAR 86 billion facilitated in environment and climate-related projects and ZAR 41 billion in mainly SA infrastructure projects. Infrastructure projects play a key role in unlocking economic growth in the economy. They do come at a lower margin, which the group is comfortable to participate in, given the important impact that they have in the economy. NIR was particularly strong, as I mentioned earlier, and it made a big contribution to the group's outperformance in the second half. Driven by growth in structuring and advisory fees, annuity income growth, and realisations in private equity. These provided a solid underpin to the improvement in RMB's ROE. The private equity pipeline is healthy. Investing and harvesting will continue to support future contribution of private equity to RMB results.
Global markets had a resilient performance in the second half of the year, with strong contribution from the fixed income and inflation businesses. The consolidated broader Africa picture you see on this slide is an aggregation of the success of FNB and RMB strategies. We have been patiently deploying capital into this strategy for many years, and the growth in NIIAC and an ROE of 24.9% is really impressive. This has been achieved on a relatively small in-country footprint, but a focus on building sustainable and profitable client franchises. The group has built a strong portfolio of businesses in its broader Africa stable. The strong returns generated by these businesses allow them to not only pay a constant flow of dividend to the group, but also create capacity for investment and ongoing growth and origination on their respective balance sheets.
The slide talks to FNB's broader Africa performance, where the strategy has been to mirror FNB's, FNB South Africa's approach of growing customers, growing deposits, and doing more with customers. The excellent traction in the agency banking model of Cash Plus has also allowed the business to drive financial inclusion in these markets, which delivers against shared prosperity ambitions and defends effectively against competition. This slide calls out another strong performance from RMB's broader Africa activities, both in country and cross-border. The CIB in country and cross-border advances grew 26% over this past year, with increasing activity in non-presence markets, which demonstrates that even without an on-ground presence, RMB is well positioned to capture deals that take place on the continent.
Namibia and Botswana saw excellent growth in advances, deposits, and margin expansion, and in constant currency terms, Nigeria and Zambia also delivered strong results. In Nigeria, this was from global market activities, and in Zambia, from TTS. The U.K. operations performed well, delivering healthy growth in earnings and an improved ROE. Lending was tough, given the U.K. macros, but in property advances, Aldermore managed to grow faster than its competitors. The Motor business was under competitive pressure, and origination was deliberately curtailed in an effort to improve returns from this business with a big focus on margins. Savings also performed well, with growth across all channels. The strategy to diversify sources of funding delivered 9% growth in corporate and business deposits.
It's worth noting that over the past three years, the U.K. ops have delivered PBT growth of over 17%, or a CAGR of PBT growth of over 17%, and PBT is now at GBP 253 million pounds, the highest the business has achieved. Capital optimization plans are underway, with Aldermore at CET1 ratio of 15.9%. The key focus is on improving returns to ROE of between 14% and 15% in pound terms over the next three years. With the completion of the NOSIA remediation, the business can now focus on improving returns from the motor business, which is a key success factor on the path to an ROE of 15%.
The group's purpose of shared prosperity speaks to its ambition to run the business in a way that continues to generate superior value for shareholders, whilst at the same time intentionally using the resources at our disposal to create better societal outcomes. The group appreciates its role as a systemic financial services group with significant resources in our care, being a trusted repository of savings. There has been a deliberate focus of underlying business strategies to deliver both financial and social outcomes in how we respond to environmental and economic imperatives. We are very pleased with the progress we are making here because of the deep impact it has. Examples include deliberate efforts to unlock growth in affordable housing. We are also looking at the supply side of housing.
Through FNB Commercial, we continue to support businesses that drive growth and employment, and as I mentioned earlier, FNB are now the largest lender to SMEs in South Africa. RMB is a market leader in sustainable finance, having facilitated over ZAR 150 billion in financing, often developing new and innovative solutions to make things possible, also assisting with accelerated transition to a less carbon-intensive economy. The group has a strong capital position, and this slide shows the work of the group CET1, which remains at the upper end of the internal target range of 11%-12%. Internal capital generation was sufficient to support both ordinary dividend payments and growth across the portfolio. Credit risk-weighted assets growth of 8% on a constant currency basis reflects strong origination, predominantly from South Africa and broader Africa businesses.
Consequently, the group's CET1 position provides ample resources to support growth ambitions into the next year and still pay a dividend in excess of earnings growth. With this year's annual dividend at an earnings payout ratio of 61%, the board is comfortable to drop the cover from the previous year, and at 1.63 times, it remains within the dividend cover range. I'll now hand over to Markos to take us through more details on the financial performance.
Good morning, ladies and gentlemen, and thank you, Mary. I'm so pleased to present the financial review of FirstRand Group for the year ended 30 June 2024. Mary has already touched on the group's performance highlights against the backdrop of the group's strategic framework, as well as the franchise operational reviews. The presentation will unpack the 4% headline earnings growth into the underlying performance and balance sheet drivers per key income statement activity. At a macro level, the group delivered strong top-line growth, with NII and NIR up 10% and 6%, respectively. Operating expenses are up 11%, which includes a 5% increase related to the GBP 140 million or ZAR 3.3 billion U.K. motor provision covered by Mary earlier.
Credit impairments are up 15%, driven predominantly by retail credit strain and a 15% increase in NPLs, as the higher for longer rate cycle continues to impact household affordability. Notably, the impairments benefited from a release of credit provisions related to the previously disclosed NOSIA remediation process. This issue has impacted the group's ability to collect or enforce against collateral on remediation accounts, resulting in the portfolio's PDs being reflected as unsecured for reporting purposes and subsequently holding higher provisions until resolved. Pleasingly, in the last quarter of the financial year, the U.K. operations management reported that the NOSIA remediation process was now more than 90% complete and could officially move back into a more business as usual PD level. This resulted in the release of previously raised credit impairments across the front and back book of GBP 46 million.
This outcome resulted in a seven basis points benefit to the group's CLR, and excluding the release, group credit impairments would have been up 25% year on year. The group's overall effective tax rate reduced to 22.4% off the back of earnings mix changes and the impact of the deferred tax raised on the U.K. Motor Commission provision. Taking the above into account, headline earnings grew 4%. Group NII was supported by balance sheet growth as well as deposit and capital endowment. This was partially offset by the group's ALM strategies that Mary touched on earlier, and the current year financial impact of the strategy resulted in a prior year ZAR 1.1 billion benefit, swinging to a ZAR 1.5 billion opportunity cost in the current period.
The net impact to NII is therefore ZAR 2.6 billion year on year and a 3.3% impact to growth. Unpacking the balance sheet further, NII was supported by continued good growth in the deposit franchise, up 8%. Retail and commercial deposits continued to grow off a high base, while RMB delivered good growth considering the base impact of a large short-term fixed deposit in the prior year. Without this base impact, RMB deposits are up 13%. In addition, Aldermore has continued to focus on improving its funding strategy and resilience, growing deposits 8% in pound terms, with good traction in attracting commercial deposits as part of the strategy to diversify its sources of funding. Importantly, this strong franchise deposit growth has enabled the group to reduce its more expensive institutional funding.
The group continues to focus on optimizing its funding and capital stack and issued additional 81 instruments during the year. The cost of funds of these instruments is cheaper than the cost of equity, which results in a more cost-effective capital structure while still supporting economic risk with core equity. Overall treasury funding strategies remain resilient, with significant funding capacity available due to the relatively lower than sector institutional funding composition of the group, and pleasingly, the average term of funding has been extended during the period. The group's advances grew 6% and were in line with management expectations, given the cycle and the consistent origination approach adopted. The strengthening of the rand post the SA elections marginally softened the rand-reported growth. Above-cycle growth was delivered in the group's retail, unsecured, commercial, and corporate portfolios, with the latter trending lower in the second half of the year.
The growth in the Mortgage and VAF portfolios is more muted, impacted by both lower demand and household affordability pressures. These loans are generally originated as variable rate products with longer durations, and therefore are more sensitive to the current rate cycle. Demand for unsecured advances remains healthy, with continued focus on low to medium-risk customers, supplemented by the teams deploying dynamic underwriting interventions using customer data insights and early vintage reads. Despite the portfolio's higher impairment requirements, the current margin still results in a nice accretive outcome.
Broader Africa continued to deliver good constant currency advances growth, and U.K. operations advances growth included risk cuts in the first half of the year due to the cost of living pressure concerns, with a focus on growing the higher return property and specialized finance businesses that are up 3% and 4% respectively, offset by a contraction, as Mary mentioned, in U.K. motor advances of 7%. Notably, the U.K. growth has picked up in the last quarter, creating some momentum into the new year. Against the backdrop of competitive pricing for both advances and deposits, the overall group margin has remained stable at 4.47%, supported by endowment, given the high rate cycle offset by the current period ALM strategy impacts. This resulted in the group, excluding U.K. operations, increasing margins by five basis points to 495 basis points.
U.K. operations, margins have declined 12 basis points in pound terms, which when translated to rands, results in a 5 basis points offset to the rest of the group. The margin decline seen here is similar to experience seen in the U.K. banking industry in general, driven by financial institutions firming up their balance sheets in anticipation of the repayment of the BOE Term Funding Scheme. The net result of overall growth and mix in balance sheet, coupled with flat margins, has resulted in net interest income of 10%, in income growth of 10%. The key drivers of this growth relate to lending NII, increasing in line with the overall average advances growth.
Transactional NII is up 4%, which is the outcome of good deposit endowment income growth of 15% and reduced by the ZAR 2.6 billion impact of the ALM strategy explained earlier. Investment deposit NII benefited from strong overall deposit growth as customers have continued to seek yield from the group's savings and investment products during the higher rate cycle, but this has been offset by margin compression due to competitive pricing pressures. Net capital endowment benefited from the 148 basis points increase in average rates in South Africa, and Group Treasury NII is up ZAR 1.7 billion, driven by lower institutional funding requirements and improved deployment of funding resources into franchise advances and higher yielding assets. Broader Africa benefited from overall balance sheet growth and margin expansion in most jurisdictions, coupled with generally higher endowment rates.
U.K. operations NII is down in pound terms, driven mainly by deposit growth exceeding advances, coupled with the aforementioned margin pressure. Credit impairments have increased 15%, 15%, resulting in a group CLR of 81 basis points. Unpacking the group's impairment charge on a six-month rolling basis reflects a consistent increase in the overall credit run rate, as the base effects of COVID-related overlays and stage curing have fully unwound. But it is mainly driven by growth in advances under the group's post-COVID origination strategy Mary called out earlier. In addition, Mary also noted the rate cycle outcomes versus economist expectations, and these have impacted retail customer affordability and arrears trends.
However, the group's thesis that low to medium-risk customers have more capacity to absorb this outcome has played out and is reflected in the NPL ratio, still at 4%, and credit charge that, excluding the last year related release, is peaking at a level that, if it's annualized, is still below the midpoint of the group's TTC range. Stage coverage remains intact and prudent for the cycle, but the impairment charge, as expected, has overall been impacted by the higher coverage required on the net inflows into stage two and three, up 3% and 15% respectively. The cycle strain on retail customers, coupled with debt counseling inflows, has resulted in high NPL formation across all retail portfolios.
Notably, this trend has slowed in the second half of the year, but debt counseling inflows have been more pertinent, a more pertinent driver in the second half of the year. Debt counseling inflows are up 17% during the period, but with a similar number of accounts in total debt review during the period. A call out I'd like to make on this is that the group has observed that the debt counseling inflows are manifesting on higher value loans, particularly in the private segment now and focused on home loan portfolios as well as the unsecured, secured portfolios. And in many instances, customers are entering debt counseling arrangements without any arrears. We are monitoring these trends closely and have implemented response strategies and education programs that are aimed at ensuring appropriate outcomes for customers.
As a final note to the slide, the U.K. operations NPLs continue to be impacted by inflows from the inability to collect on the NOSIA remediation portfolio. As this program matures into business as usual, we expect this trend to gradually reverse. Unpacking the group CLR and charge by underlying customer segments highlights the strain in the retail portfolios, which is the only portfolio above its TTC range. I will unpack this further shortly. The remaining lending portfolios were predominantly impacted by front book origination strain off the back of strong advances growth. The overall commercial portfolio continues to perform well and is above expectations, with a CLR at 61 basis points. There has been early signs of strain in the group's unsecured SME portfolio, but these represent only 1% of the group's total advances.
The corporate charge is up significantly year on year, but off a low base, and at thirty-three basis points is at the bottom end of its TTC range and is predominantly driven by front book origination. The U.K. operations impairment impact reflects a net release during the period. The two significant call-outs relates to the NOSIA remediation releases related to the MotoNovo front book and an FLI cost of living release off the back of improving macros in the U.K. in the second half of the year. These impacts have combined released forty-one benefits as a benefit to the U.K. op CLR, and without them, the core portfolio is trending just below the bottom of its CLR TTC range. I will now unpack retail to give some color to the credit performance.
The retail portfolios have all benefited from the deliberate origination focus mentioned earlier by Mary, with both the retail secured portfolios performing within our credit expectations considering the rates cycle. The group's FLI models had anticipated some of this, risk manifesting and resulted in releases against the performing portfolio, particularly in the first half of the financial year. In addition, as Mary alluded to earlier, the residential mortgages portfolio was significantly impacted in the last quarter of the financial year as property prices softened based on the group's internal house price index and loan instruct data points that inform our LGD models. This resulted in higher LGDs for both FLI and NPL recoverable value purposes and resulted in the majority of the increase in the mortgages CLR to 45 basis points.
In addition, the house price index has turned as prices have started to recover in the early parts of the new year, but this impact is expected to be a gradual normalization. WesBank VAF has performed well and remains below expectations and is benefiting from the overall impairment, origination, and risk appetite strategies that have been implemented. The unsecured portfolio CLR at 7.79% is slightly above expectations, but driven predominantly by front book growth and the debt counseling impacts and higher coverage requirements on NPL inflows mentioned earlier. Turning to NIR, that is up 6%, and I'll unpack it per activity, starting with fee and commission income that is up 5%. FNB's fee and commission income is generally driven by fee inflation, customer acquisition, and volumetric activity.
Pleasingly, FNB is acquiring new customers across all segments, and digital transactional volumes continue to scale. The decision highlighted during the interims to reduce real-time payment fees resulted in a reduction of R985 million for the full year and is now in the base. Pleasingly, volumes continue to scale at these new pricing levels. Fee income-related expenses have partially offset income growth and is driven by the higher transactional processing volumes across both issuing and acquiring, as well as inflation and Forex translation impacts on the Visa and Mastercard expenses. Trading income is up 9%, a good recovery from the first half performance, driven by a very good performance from the fixed income desks, up 36% year on year.
This has been partially offset by a softer performance in our Forex desks, driven predominantly by the devaluation impacts of the Naira and the Zambian Kwacha. RMB's principal investment strategy continues to deliver good outcomes with a significant realization in the first half of the year, and overall fair value income is up 36% year on year. My final point on this slide relates to the little light purple block that reflects a circa ZAR 1 billion swing in fair value income due to accounting mismatches in the underlying Aldermore interest rate fair value hedging instruments. Importantly, economically, the group is comfortable that these hedges achieve the stated objectives within its risk management frameworks. However, due to accounting treatment of the various hedging instruments, the prior period U.K. rate hiking cycle resulted in a significant profit being recognized.
This profit has partially unwound in the current period as the accounting outcome ultimately pulls to par. Group Treasury is working with the U.K. operations teams on potential mechanisms that achieve the same economic outcome with less accounting volatility. If we turn to investment income, it's up 40%, and it's driven by a pleasing annuity base of the private equity and the WesBank associates, increasing significantly during the period, up 24% and 66% respectively. Private equity continued to deliver ROE-enhancing realization income, albeit down 44% off the back of the base effect of a single large outsized realization in the prior period of ZAR 1.2 billion. Investment income also benefited from the non-repeat of the prior year Ghana sovereign impairment.
The usual snapshot of the private equity business reflects continued investment in the portfolio, and despite the current realization cycle, the embedded unrealized value of the portfolio has grown to ZAR 6.6 billion. Turning to insurance, the group's insurance strategy continues to deliver good financial outcomes. Overall, PBT is up 11% despite the prior year base impact in Credit Life relating to the release of the remaining TERS and COVID-19 reserves. Core Life continues to scale with a very good overall financial and operational performance, up 35% year on year. The group's gross written premiums reflect the outcome of the strategy to diversify and scale insurance activities, which Mary highlighted earlier, with growth across all product lines. Operating expenses are up 11%, with core operating costs up 6% and a further 5% impacted from the motor commission provision.
FNB SA delivered a strong operating expenses print, up 1% year on year, as platform investments of the past allowed for lower professional fee spend and staff costs during the period. I will cover staff costs further on a separate slide. In addition, Mary has noted the breakdown of the U.K. motor income statement, in impacts, and I'd like to deal with this accounting provision in a little more detail. Given the uncertainty related to the U.K. Motor Commission review and the subsequent guiding statements made by the FCA, the group has raised an accounting provision in accordance with the requirements of accounting standards of GBP 127.4 million, or ZAR 3 billion. This provision and the methodology have been through a robust governance process, including both the Aldermore and FirstRand Audit and Risk Subcommittees and boards.
Due to the uncertainty surrounding the matter, the calculation of this provision required significant judgment by management. It is based on multiple probability weighted scenarios that include both potential commission and interest rate scenarios, using the group's own data analysis, and which includes any potential legal, operational, and redress costs. The amount provided is the group's best estimate of a conservatively struck accounting provision, and a consistent methodology has been used to calculate the provision across both Aldermore back, front book and the back book in the FirstRand Bank Limited London branch. As previously noted, the majority of the provision resides in the FirstRand Bank London branch. The group continues to invest in platform modernization and technology stack.
IT costs remain overall ahead of inflation, but the current year cost outcome in FNB reflects that the group remains focused on delivering benefits from these investments. Finally, turning to staff costs, these are the largest driver of the group's cost outcomes and are up 5% year on year. This is mainly driven by average salary increases of 6%, increased costs of certain skilled resources, and offset by a 3% headcount reduction off the back of staff attrition that did not have to be replaced by FNB, where prior platform investments delivered the required scale and automation to do so. Variable costs are overall in line with operational performance, and other staff costs benefited from a lower leave pay provision.
Finally, in closing, the group's balance sheet remains conservatively struck, and it continues to allocate resources under an FRM framework designed to deliver superior returns for shareholders. Despite tough macros and the impact of the U.K. motor provision, the group has delivered a resilient financial performance, with earnings up 4% to ZAR 38 billion. I'll now hand you back to Mary as she closes with the group's forward-looking prospects and guidance of the reported financials.
Thanks, Markos, and well done. Looking ahead and looking forward, the macroeconomic environment, in our view, we believe will remain challenging in the year ahead. Global policy rates are expected to fall. And in fact, the Bank of England has already started the easing cycle in the U.K. Policy makers in some of the countries in broader Africa portfolio are also expected to follow. We expect the South African Reserve Bank to follow along, and the Fed as well over this coming month. I think important to highlight is that our house view expects rate cuts of seventy-five basis points over the next twelve months. We are, however, mindful that interest rates are unlikely to fall to levels seen pre the pandemic years.
The graph on the right-hand side shows the work by National Treasury on the contribution of structural reforms to South Africa's potential growth rate. As a group, we have been tracking structural reforms for several years and are encouraged by the progress made by Operation Vulindlela and a track record of reforms being established in South Africa. As these reforms gain momentum, it should support further lift in confidence and growth. It should support our clients' businesses and provide a healthier long-term operating environment in South Africa. If I consider the shape of the income statement for the next year, we cannot escape the fact that macros matter. Given we expect a macroeconomic environment to improve but still present persistent challenges, particularly a shallow rate cycle...
We expect our retail lending is expected to remain at similar levels, with stronger growth emanating from our commercial and corporate businesses, so top-of-the-house advances growth will be marginally higher than this past year. This growth trend, combined with the fact that corporate and commercial advances are written at lower margins, means overall lending NII will be weaker, and this will be further exacerbated by the impact of rate cuts on the unhedged portion of the endowment. We still expect ongoing healthy growth in deposits. NIR has the potential to significantly be stronger. Fee and commission income in FNB will bounce back from the fee reductions in this past year. There are a number of potential private equity realizations. However, these are most likely to materialize in the second half. We expect insurance to continue to grow at similar growth rates to the current year.
Credit will trend up slightly, but remain below the midpoint of the through-the-cycle range of the group. We are quite cautious in our approach in expectations of where retail credit is going to perform and unfold, but we hope for a better performance. We are confident that operating expenses will remain tightly managed, and growth will be sub-inflation, given the high base created by the motor provision and related costs. This should result in a lower cost-to-income ratio and positive jaws. We therefore expect earnings growth to be at the top end of our long-term target range of nominal GDP plus 0% to 3% of the ZAR 38 billion of earnings produced in the current year.
Despite the correlation between macros and a financial institution such as FirstRand, I believe that this group, given its distinct and diverse portfolio with large market shares of economic profits, is particularly well positioned to benefit from any uplift in system growth. The strategic calls I covered earlier will continue to deliver growth and returns to shareholders, which I think has been demonstrated by the level of operational outperformance by our franchises this year. I think in closing, I'd like to thank our staff across FirstRand for their hard work, particularly in looking after the needs of our customers, and thank you to our customers for their trust in us. Thank you to the FirstRand board, and thank you to all our stakeholders for your continued contribution in ensuring that FirstRand continues to have a positive impact. Thank you.
I think we can now go for any questions, session, so if there are any questions. Thank you.
Good morning, thanks very much, Mary. Yeah, sorry, Ross Crocker-
Oh, sorry.
- from Investec.
Yes.
Thanks very much for the presentation. Just two questions from me. Maybe could we just get an update on the fintech strategy that Jacques's leading? And secondly, just from a capital allocation perspective, you're talking to slightly muted advances growth in FY 2025, and you've got a lot of excess capital. So how do you think about that in terms of what you're going to do with that excess capital? Thanks.
Okay, thanks for that. So, let me start with the excess capital. I think I guess the first thing is that I suppose it allows us- it allowed us to declare dividend slightly ahead of our earnings growth. And I think for the growth that you've seen, particularly in RMB, strong growth coming from RMB, we still expect that should come, I think, in the next year, particularly as the structural reforms get some traction. So there is a fair amount that we're expecting to be deploying in South Africa and in the region as opportunities come about.
And I guess you can always rely on the fact and the track record of management that when we get to a place where we are sitting on capital that exceeds the business needs, we will do the right thing. So I think we're not pencilling in any big plans at this point in time, but I guess we always remain on the lookout for opportunities, particularly to scale our... You know, particularly to grow some of the businesses where we think we are subscale. So I think we're always on the lookout for those opportunities, but if we don't deploy that capital, we know what to do with it.
Okay, I think on the nav», on the fintech strategy, maybe let me just answer that briefly and say that I think when we come back to report in a year's time, we'll be able to give a bit more color. There's lots of thinking underway. The FNB team and the nav» team are going to be launching some solutions and product offerings over the next six months. But I think in terms of just a much bigger strategy and our thinking, you know, I think I would still say give us some time. Lots of good thinking, but I think not yet at the level where we can put some concrete plans ahead of our shareholders. But that's a strategy that we remain quite excited about.
I think we still think it's going to help us with our growth outside of our existing customer base in South Africa, in the markets in which we operate in, and we don't also operate in. So, it's a strategy that we're excited about its potential. But yeah, give us a year.
... James Starke from RMB Morgan Stanley. Mary, good morning, thanks for the opportunity. Two questions from my side. Firstly, just with regards to FNB and in particular, the retail bank, we're seeing impressive growth in customer numbers. I think it's around 4% at the retail level there. If you could just give us some color or context around the profile of these clients that you're winning, and perhaps what your market intelligence is telling you about why they're joining FNB. The second question, staying with FNB, regards fees and commissions, in particular, the fee reductions. You've taken about R1 billion. What gives you comfort that there won't be further meaningful reductions to fees going forward in the next 12 - 24 months? Thank you.
Thank you, James. What I did forget to say is I've got my executives with me, so this sounds like a Harry Kellan question. So Harry, maybe if you can just take the two questions from James.
James, thanks for the question. The first one on customers. One, it is net active customers, so we do exclude those customers that become dormant, and the growth, you're right, 4% in South Africa, retail and commercial, similar. It's across the spectrum, James. If you look at it, and I think in the book they give a breakdown between what's in the personal segment and the private segment. One of the things in the private segment growth is also customer migration as they go up in terms of earnings curve, which is coming out of the personal. It isn't any particular segment. I think it's across from... And as you know, we also have a zero fee account, both in commercial and retail on a monthly basis.
So we've also seen good growth there, where as customers coming in, into that part of, of the banking net. Confidence on, in terms of NII and fee reductions, I think there's a for sure, there's an evolution happening, but we're comfortable that actually it isn't another step down to the same effect. But James, you would remember, for a number of years now, FNB continually looks at its fee profile. So from memory, last year was probably just ZAR 500 million of giveback in terms of fees. Prior year was probably slightly around about ZAR 1 billion. So I think that kind of trend line of a similar number is what we always expected from the business. Probably this year, a bit less, I think. There hasn't been significant opportunity to identify those.
But yes, external pressure is always the case. You'll always see the discussions. There's press discussions in the industry over reform, modernization of payments. So that will come through as you see, but I don't think it's a twelve-month kind of story.
Mm-hmm. Yeah. So James, I think we're comfortable that we don't have such planned such big fee reductions coming through in the next twelve months. But as we spoke earlier, we're very alive to the fact that the competitive pressures in this space will require us to always make sure that we are competitive. So I think, as Harry alluded, currently making sure that we can respond on all fronts, particularly in payments, but that's something that we think will evolve over over the next couple of years. I think there are no more any more questions in the room? Okay, Sam, do we move to the online platforms?
To the webcast.
Is it on? Yeah. Okay, thank you. Got a few questions. First question from Chris at Ninety One: With the FCA provision in the base, you start the year at circa plus 6.4% growth. With that as context and your line item guidance, your guidance for growth of nominal GDP plus three, circa 10%, appears very conservative. Please comment.
Thank you, Chris. I mean, I think two things that I'll say, Chris, that at I guess at this point in time is just to highlight that we do expect softer NII growth, I think for the reasons that I've outlined around mid-single digits. I mean, that's a step down from the 10% NII growth that we've seen, and I guess the big delta really is what happens to credit performance, particularly in retail, you know, so I think when we went into our planning process for this year, three months ago, I mean, expectations of where the consumer is going to be and what played out in the second half of the year didn't give us a lot of confidence around that retail experience coming down.
So hopefully we can do better than that, Chris, but I think, we prefer to be cautious at this stage.
Maybe just Chris, one call out is I think, you must just remember the pre-tax provision is ZAR 3 billion, and the post-tax provision to the earnings impact is ZAR 2.2 billion. Just go to that. The six point four is a little higher than the post-tax impact, but it doesn't change Mary's points.
Good, thanks.
Okay. Question from Harry at Anchor Stockbrokers: How should we think about the potential for further cost savings in RMB?
How should we think about-
In FNB over the next two years? Can FNB's cost growth remain below inflation? You noted a cautious outlook on the retail credit loss ratio. Would you say the retail credit loss ratio peaked in the second half of 2024r? So sorry, there's two questions there, Markos.
That's fine. I think we've got it. So, Emrie, how should we think about-
No, Mary, sorry, that was a mistake. It was FNB.
... Oh, sorry, maybe just read the question properly again.
Okay. How should we think about the potential for further cost savings in FNB-
Yeah
over the next two years? Can cost growth remain below inflation?
Okay. Markos, do you want to take that?
Yep. So, obviously this year, a significant saving achieved through FNB. I think probably a bulk of the savings came through this year, and you're gonna see this inflationary, plus whatever staff costs grow by in the years ahead. I don't think there's big plans to grow headcount, but definitely lots of investments still into platform. We also are going to continue to invest in new innovations, and those will come through. So I don't think it's going to be sub-inflation growth, but it won't be much above inflation either from an FNB overall perspective.
I think that one key thing is important, is that, I mean, FNB is still also has some investment needs over time. So cost savings should just make sure that they are sustainable, and I think at Markos's guidance, of just above inflation, should hopefully be a sustainable run rate for RMB. But we're very mindful that we don't want to cut costs, and then a few years later, realize that we cut into the muscle. The second one was about credit, a cautious credit outlook.
Yes. Would you say the SA retail credit loss ratio peaked in the second half?
I'll take that. Yes, that is kind of... That is what I said on the slide, that we do think retail has peaked. The total group charge at that ZAR 7.2 billion is where we think the anchor is from the top of the house. We do think it's going to remain elevated, and I guess kind of the GNU and how the activity in the year ahead and rates coming down a little bit quicker than when we did originally anticipate budgets and the likes. So now first quarter of the year, not the second quarter, will weigh into that, but as it stands, we do think it's peaked.
Question from UBS: How confident are you that the motor finance provision will be tax deductible?
Okay, I mean, so we've taken our tax, legal advice. Obviously, at this stage, we've noted we do not believe we've broken any laws or regulations. That would be the biggest driver of whether this would be tax deductible or not. We've recognized the income for the earnings in the jurisdiction and effectively paid taxes on it. Therefore, so as we stand today, we don't believe this would be a concern.
Just a question from Henry, looking for clarification on our statement on NII. Are you saying NII will decline, or should it read NII growth will be weaker in the current year?
NII growth will be a lot softer than the current year, around that middle digit range. So definitely not a decline, just a lower earnings, lower growth rate.
Okay, so I've got a number of questions from Citi. I'll go through them one by one. First question: FNB and RMB's ROEs have reduced year on year. How do you see ROEs for these businesses trending over the next twelve months, and what would the drivers be for this movement up?
I think for FNB, definitely a stronger credit performance will lift that, the FNB ROE. I think that's really, really the big call-out for FNB. RMB, Emrie should I give you an opportunity to comment? Do you have a mic? It's coming there.
Good morning. Thanks, Mary. Yeah, I think on the ROE for RMB, we do see upside from where we are now. And how we'll deliver that is, as Mary has alluded to, in the outlook, increased private equity realizations. We will also continue to manage those more deliberately to ensure some consistency or reduce the volatility from that. Furthermore, we are actively looking at our revenue mix and then also at our, RWA optimization and deployment. So I think the combination of those three should see an upward trend in ROE from RMB.
Thanks, Em.
Okay. Second question: In the booklet, you mentioned that increased capital was allocated to WesBank for exposures outside FRB. What drove the need for further capital injection for these exposures? How big are these WesBank exposures?
Um, Mark?
Yeah, I'll take it, Mary. So it's just we've got the associates, and there was just a top-up of capital for the requirements of the associate structures that we have in place in WesBank. So it's part of the normal course of business for those entities, 'cause they are separate legal entities. Mm.
Third question: Can you provide an update on inorganic growth opportunities you are seeing across the continent, particularly in Kenya, that you have mentioned before as an attractive opportunity, and Nigeria, where there is likely to be consolidation in the market? Could the current macro environment in these two countries provide an attractive entry point opportunity for the bank?
I mean, in short, I'll say they could. As a group, we always remain on the lookout for opportunities. I think we were the few that we've actually had a look at, but one, we were not successful, and that was in Ghana. Yeah, I mean, I think we will take a serious look at any opportunity that looks like it will help unlock value for us.
Does management see Capitec's digital offering as a threat to be addressed, particularly their diverse offerings and scaling ability? Is this also a threat to FNB fee and commission income?
Harry, can I give that one to you?
Thanks for that question. So, I mean, I think the first thing is we see all competitors as a threat. That's the way we, the business operates. On a specific question in terms of digital and in particular app, the banking app, maybe it's a biased opinion, but I think we've got more detailed and much more options in terms of our banking options across our, across our app. But you'd expect that, given that actually FNB does offer a wider spectrum of products. So I think on the app side, we're fairly confident that we can actually continually innovate and improve. I mean, just for reference, actually, about three months ago, FNB did win the best banking app from Global Finance. So I think we can... We're clearly confident to hold our own on that.
Yeah.
No more questions. I don't know if there are any questions on the audio.
Yes, we have a question from Charles Russell of SBG Securities. Please go ahead.
Thank you very much for the presentation. Just a point of clarification on this, U.K. motor remediation story. Is it correct to assume that you're not expecting any further provisions that would need to be raised? And some of the wording in your, you know, printed document is that you cited material completion and, you know, completion of this NOSIA remediation. Is there a risk of further claims? That's question one. And then, question two, if I might, if I may, is just looking at the private equity business. Is it likely that the group is entering a more favorable period for private equity, perhaps even comparable to the twenty fourteen to twenty eighteen period, in terms of earnings accretion, you know, ROE accretion?
And then last question, could you just please elaborate on your expected NIM movements into FY 2025? Thank you.
Okay. Do you want to take the first one, Markos?
Yeah, right. So I'll cover the first one and the NIM. So thanks, Charles, for the question. On the... There's two remediation processes, so you called both out there. The motor remediation process is the one that we've raised the current year provision against. That is the one that still has quite a bit of uncertainty. The FCA have made a notice that they will probably give guidance only May 2025 . So we will wait further engagement on that. The pleasing piece is they are engaging with the industry on how possibly to take this forward, so we will be part of that engagement as well.
The other remediation, which was the coming to near completion of the Nocia remediation process. All of the credit provisions that were raised for the secured to unsecured, unsecured to secured PD have been released. The potential now is how the collections play out on that portfolio. A number of accounts were written off as part of the process, and now we see how the collection teams go collect against it. But we are not expecting further provisions to be required to be raised against that particular remediation as such. And finally, let me take the NIM one while I've got the mic.
We don't guide specifically on NIMs, but if you take the NII guidance Mary's given, you take into account that the rand has strengthened and is expected to stay around that level for the year ahead as an impact into the dollar-based NII and the pound-based NII we earn, and you take into account the points I made on the U.K. NIM. I think you can use sort of marginally softer NIMs as where the outcome will result. There is some offsets, obviously, from the lower institutional funding costs that we have in the base.
And I think on the private equity realizations, are we going back to the period of a couple of years ago? I hope so. I think the teams have been busy really focusing on investing and realization activities. But I think there are many factors that go into whether that's suitable times for exits. And I know Emrie is really very focused on making sure that, yeah, that the business continues to grow, and I think deliver the ROE underpin that they've delivered. But always a lot of uncertainty, and I think it also just really depends on what happens in South Africa in terms of flows into the market. Any other questions? Right.
We have no further questions on the lines. Thank you.
Let me take this opportunity to say thank you to everybody who's joined us, and I think there is lunch after this presentation. Thank you.