FBC Holdings Limited (FBC.zw) HY2019 Interim Report

We have extracted a Chairman’s Statement from the 2019 half year interim report for FBC Holdings Limited (FBC.zw), listed on the Zimbabwe Stock Exchange:

It is with great pleasure that I present the financial results of FBC Holdings Limited for the six months ended 30 June 2019.

Financial Highlights

  • Group total income : ZWL$198.4 million
  • Group profit before income tax : ZWL$90 million
  • Group profit after income tax : ZWL$54.3 million
  • Cost to income ratio : 55%
  • Basic earnings per share (ZWL cents) : 8.74
  • Net asset value (ZWL cents per share) : 43.53
  • Return on equity: 20%

Financial Performance Review

Following the change in the functional currency, FBC Holdings achieved a commendable set of results for the six months ended 30 June 2019, recording a profit before income tax of ZWL$90 million and profit after income tax of ZWL$54.3 million. The favourable performance continues to be underpinned by the Group’s diversified business model.

The Group benefitted from its effective hedging strategy by recording notable exchange gains and fair value gains following the introduction of the Zimbabwe dollar. Total net income for the Group was ZWL$198.4 million for the period under review, primarily driven by the banking subsidiaries. Net interest income performance was at ZWL$27.4 million for the period under review. Net fees and commission income of ZWL$32.3 million was realised as the Group continues to make strides on its digitalisation strategy. Net income from property sales was ZWL$1.05 million for the period reflecting a slowdown in property sales as the market readjusts to determine pricing equilibrium in response to policy changes on the transacting currency.

The launch of a revolutionary user based insurance product, MyDrive, brought about positive growth within the insurance subsidiary resulting in sustained growth in net earned insurance premium. Despite the challenges weighing down the insurance sector, the Group recorded net earned insurance premiums of ZWL$18.5 million for the six months ended 30 June. Net trading income for the period was ZWL$73.3 million with the major proportion being foreign exchange gains. Other operating income comprising of fair value adjustment to financial assets and investment properties totalled ZWL$45.8 million.

Administrative expenses were ZWL$87.7 million for the period under review, driven by an increase in operating expenses arising from the general price increases in the economy. However, due to the strong income performance reported in the period under review, cost-to-income ratio improved to 55% compared to 71% recorded in the comparable period in 2018. The Group’s statement of financial position as at 30 June 2019 was ZWL$2.36 billion with loans and advances of ZWL$1.2 billion constituting 52% of total assets. Total equity attributable to shareholders of the parent company was at ZWL$269.9 million translating to a net asset value of ZWL43.53 cents per share.

Legacy Debt

The Group’s mortgage business borrowed a sum of US$5 million from a regional financial institution for the purpose of providing mortgage financing. An amount of US$2.38 million is outstanding at reporting date. In line with Exchange Control Directive RU28 dated 22 February 2019 and Exchange Control Circular 08 dated 24 July 2019, the Group registered the amount outstanding as legacy debt and an amount of ZWL$2.38 million was paid to the Central Bank inline with the directive. The Group has accordingly classified the payment to the Reserve Bank as a receivable in United States Dollars.

The Group is also in the process of registering an FBC Holdings external loan of USD 10 million obtained from another regional financial institution under the same arrangement. Pending finalization of the registration process for this loan, the Group has absorbed the exchange losses arising therefrom. The exchange losses are expected to reverse upon conclusion of the registration process.

Operating Environment

The operating environment remained challenging throughout the first half of 2019. During the period under review, inflationary pressure remained a cause for concern, and its effects have been felt across the economy as evidenced by the general increase in the cost of doing business. The annual inflation rate has been on an upward trajectory having closed the first half of 2019 at 175.7% from 42.1% at the beginning of the year. The increase in prices of goods and services was largely being driven by the adverse movement in foreign exchange rates.

On 24 June 2019, Zimbabwe’s fiscal authorities responded by introducing a raft of measures aimed at stabilising the Zimbabwean economy. Through Statutory Instrument 142 of 2019, the use of the multiple currency payment system was abandoned, and a directive issued for all local transactions to be conducted using the Zimbabwe dollar.

Financial Services Sector

While the performance of the financial services sector has remained relatively stable, a number of monetary policy measures implemented during the period have resulted in some significant developments in the sector. Interest rates have been on the increase in reaction to the negative returns arising from an increased inflation rate and the need to discourage rent seeking behaviour from speculative borrowing. The liberalisation of the interbank foreign exchange trading has seen an upward movement in exchange rates and an increase in interbank trades as the gap between the formal interbank rate and the parallel market rate narrows. This, coupled with the reintroduction of Bureau De Change has resulted in increased volumes of foreign currency traded on the formal market, which has contributed to improved availability of foreign currency on the formal market, albeit at a higher cost. To capitalise on the opportunity presented in the foreign exchange trading space, MicroPlan Financial Services obtained a Bureau De Change operating license and commenced operations to capitalise on the liberalisation. As at 30 June 2019, the ZWL was trading at ZWL$8.56 against the US$, which is 242% weaker compared to the ZWL$2.50 initial exchange rate set on 20 February 2019 when the interbank forex market was introduced. Financial technologies continue to evolve and revolutionise access options available in the transactional environment. It is one of our core objectives to promote a transition towards a cashless society. In this regard, we have increased POS deployment in the market and officially launched more secure chip and pin ATM cards in a bid to improve security.

The Insurance Sector

The Insurance and Pension Commission (IPEC) launched the Zimbabwe Integrated Capital and Risk Project (“ZICARP”) which is aimed at creating market discipline and improving confidence levels in the country’s insurance sector. ZICARP, essentially consists of three pillars which include the Risk- based Capital Framework, Own-Risk and Solvency Assessment framework (ORSA) and the Market Disclosure Framework. The demand for insurance products has however remained subdued as a result of erosion of disposable income and limited capacity by the general public to keep pace with increasing insurance costs from the continued asset value appreciation driven by a depreciating local currency.

Property Market

Real estate property remains one of the preferred hedge solutions in the prevailing inflationary environment. Activity on the property market however remained slow and this was further worsened by the abolition of the multi- currency system which has discouraged sellers from disposing their real estate property. On the construction side, the cost of building materials remains high resulting in a general slowdown in construction activities.

Stock Market Performance

The Equities Market has registered moderate gains on the back of the announcement of fiscal and monetary reforms anchored on the aforementioned Statutory Instrument 142 of 2019. During the period under review, the Zimbabwe Stock Exchange (“ZSE”) gazetted revised Listing Requirements under Statutory Instrument 134 of 2019. Among other equally important amendments, disclosure of periodic financial information has been changed from bi-annually to quarterly, in line with international best practice.

Interim Share Price Performance

The FBCH share continues to receive substantial investor attention as evidenced by the volumes of shares traded. During the interim period volumes traded of 30.5 million increased by 44% compared to the same period last year. The share price increased by 72% from the December 2018 price to close the interim period at 60.25c on the back of a number of factors namely increased demand from investors, change in functional currency and the general flight to inflation hedging assets by investors. The 72% registered growth in the share price was ahead of the 40% registered by the broad market share index.

Dividend

On behalf of the Board of Directors, I am pleased to advise stakeholders that an interim dividend of 2.232 ZWL cents per share was proposed for the half year ending 30 June 2019 after taking into account the performance of the Group. The interim dividend proposed amounts to ZWL$15 million which is 3.6 times dividend cover.

FBC Trend Setting

FBC Holdings continues to make inroads in the market with new and innovative products that seek to provide various solutions for our clients. During the period under review FBC Holdings subsidiaries have received the following accolades;

  • MyDrive won the 1st Runner up Innovative Product Award in the Business Weekly Inaugural Consumer Insurance Awards.
  • FBC Holdings scooped the Institute of People Management of Zimbabwe (IPMZ) 1st Runner up People Development and Impact Award for the year 2018.

FBC Holdings was recognised as one of the nation’s Top Five Listed Companies in The Zimbabwe Independent 2018 Quoted Companies Survey (QCS). This achievement is testimony to the sustainable and stable financial performance of the Group over the years. The survey considered multiple dimensions which include market capitalisation, ratio of volumes traded to listed shares, share price movement, highest percentage movement during the financial year, turnover, comprehensive net income for the year, total assets, growth in turnover, growth in net profit, growth in total assets, net profit margin, basic earnings per share, price earnings (P/E) ratio, asset turnover ratio, return on equity and return on assets. The Group anticipates that it will continue on this positive trajectory, resulting in sustainable value creation for stakeholders.

FBC in the Community

FBC Holdings continues to support sustainable and value driven community based initiatives. The Group believes in ploughing back into the various communities that it serves in. In this vein, FBC Holdings supported various initiatives that include but are not limited to education, sport, health and environment, culture and the welfare of senior citizens.

Digital Transformation and Innovation

The Group continues to advance its efforts towards digital transformation with the Group having launched a high-tech, digitalised “Contact Centre System”. The newly deployed FBC Contact Centre defines a technological evolution from the traditional “Call Centre” to a modernised digital customer experience management system. The new platform is well equipped with advanced technologies for handling inbound and outbound interactions. During the period under review, FBC Insurance also launched an innovative motor insurance product, MyDrive, which is enabled by telematics technology. Instead of customers paying fixed term insurance premiums as has been the norm in the local motor insurance industry, MyDrive premiums are based on usage of the vehicle and is more risk based at a granular level. Resultantly, customers only pay for the distance that they drive.

The Group embarked on a core banking system upgrade for the Bank and Building Society. This investment brings in a new Digital Banking Experience (OBDX) in a secure and convenient environment. The Group expects this initiative to improve service standards and product offering in line with customer expectations. This is in line with the Group’s digitalization transformation strategy rollout. The Group has replicated the same strategy in other subsidiaries. Overall FBC Holdings expects higher customer satisfaction levels in response to this digitalization strategy rollout across the Group.

Compliance

The FBC Group is committed to complying with all legislation applicable to its operations including financial crime regulations pertaining to money laundering, terrorist financing, bribery and corruption and sanctions. Any breach of the above may expose the Group to a plethora of serious risks such as Legal, Compliance and Reputational Risks as well as Financial Abandonment and De-risking. The consequences of the foregoing would impair the Group’s ability to provide seamless service to its clients and ultimately threaten its going concern status.

As such the Group has put in place a robust compliance framework to ensure adherence to all legislation and international best practice. A considerable amount of resources have been availed to enable an effective compliance framework that encompasses a Compliance Culture, Board Oversight, Policies and Procedures, Automation of Compliance Systems, Training and Internal Controls. The Group continues to place emphasis on this area so as to ensure its operations are in line with the evolving regulatory environment.

Environment, Social and Governance (ESG) Priorities (Sustainability)

The Group’s primary objective is to deliver increased profitability whilst taking cognisance of environmental and social safeguards. Since 2016, we adopted a deliberate strategy to align our lending policies to the demands of the IFC Social and Environmental Management System (SEMS) and have thus been periodically disclosing our sustainability initiatives as we look forward to scaling up such initiatives. The Group remains committed to keeping the environment safe and ensuring that our valued clients pursue environmentally friendly business.

Corporate Governance and Board Appointments

On behalf of FBC Holdings, I wish to thank the following board members of the FBC family who retired in line with our corporate governance policy;

  • Philip Chiradza – FBC Holdings Limited
  • Godfrey Nhemachena – FBC Holdings Limited
  • David Birch – FBC Reinsurance
  • Marah Hativagone – FBC Building Society
  • Boyman Vincent Mancama – FBC Insurance
  • Geoffrey Senzo Mhlanga – FBC Insurance

The aforementioned former board members contributed immensely to the growth of the Group. In order to maintain compliance the retiring directors are being replaced. The Group is awaiting relevant regulatory approvals for identified replacements.

Outlook

Business is not immune to economic challenges and geo-political strife, even if the correlation between financial markets and growth in the economy is weak. The present political and economic climate creates a wide range of challenges across many industries, which result in difficulties but also opportunities to the Group. Currency reforms, robust monetary policy interventions, and the continued international re-engagement efforts by the government are critical to the future performance of FBC Holdings and the economy at large. The Group remains optimistic that the various policy interventions will yield the desired results for long-term sustained economic growth.

Appreciation

I would like to convey my sincere gratitude to our various stakeholders, strategic partners, clients and regulatory authorities for their unwavering support which continues to keep the FBC brand shining. I am also grateful to my fellow Non-Executive Directors of FBCH, Group Chief Executive John Mushayavanhu and the entire FBC team for their concerted effort in driving the growth, profitability and stability of the Group. I look forward to the continued dedication of the team as we navigate through the prevailing economic challenges while keeping focused on our quest for prosperity.

I thank you.

Herbert Nkala
Group Chairman