FINANCIAL FEATURES. Headline earnings per share up 25% Ordinary dividends per share up 33% Return on assets of 13% Return on equity of 39%

Transcription

1 African Bank Investments Limited Annual Report 2005

2 FINANCIAL FEATURES Headline earnings per share up 25% 250 Ordinary dividends per share up 33% , Cents ,4 104,4 140,4 161,6 Cents Ordinary dividends per share Special dividends per share Return on assets of 13% Return on equity of 39% ,9 13, ,4 % ,9 10,6 11,6 % ,6 23,2 25,9 31, Sales up 22% Bad debt-to-advances 9% Cost-to-advances 18% R million % of advances ,6 8,2 9,5 9,1 % of advances ,5 17,9 19,1 18,5 18,

3 FINANCIAL HIGHLIGHTS FOR THE 12 MONTHS ENDED 30 SEPTEMBER 2005 FINANCIAL HISTORY Audited Audited 12 months 12 months ended ended 30 Sept 30 Sept % change Key shareholder ratios Headline earnings R million Headline earnings per share cents ,7 161,6 Fully diluted headline earnings per share cents ,9 155,7 Attributable earnings R million Attributable earnings per share cents ,0 160,3 Fully diluted attributable earnings per share cents ,2 154,5 Number of shares in issue (net of treasury shares) million 5 495,1 472,3 Weighted average number of shares million 470,6 471,6 Fully diluted number of shares in issue million (3) 472,4 489,4 Economic profit (headline earnings less charge for cost of equity) R million Net asset value per ordinary share cents (20) 446,6 559,0 Declared dividends per ordinary share Interim paid cents Final declared cents Total ordinary dividends cents Special dividends paid cents 70 0 declared cents Total special dividends cents Total ordinary and special dividends cents Dividend cover (ordinary dividends vs attributable earnings) times 1,6 1,7 Performance ratios (per RoE model) Gross income yield on average advances % 63,2 60,3 Bad debt expense to average advances % 9,1 9,5 Bad debt expense to interest income % 17,7 19,4 Cost-to-income % 28,6 30,8 Cost-to-advances % 18,1 18,5 All-in tax rate % 40,9 42,4 Return on assets % 13,0 11,6 Return on equity % 39,4 31,3 Asset and credit quality ratios Gross advances R million Average gross interest-bearing advances R million Total NPLs R million (27) Total impairment provisions (including insurance reserves) R million (33) NPLs to gross advances % 25,7 36,6 Total impairment provisions as a % of gross advances % 17,5 27,0 NPL coverage % 68,0 73,8 Bad debt write-offs to average gross advances % 19,8 13,5 Capital ratios ABIL group capital adequacy % 37,4 40,4 African Bank capital adequacy % 34,3 34,7 Cost of funds Average cost of funds % 12,2 12,7 Six-year compound 12 months to 30 September (audited) R million growth % Group income statement Interest income on advances Net assurance income Non-interest income Total revenue Charge for bad and doubtful advances 8 (488) (484) (445) (553) (6) (289) (301) Risk-adjusted revenue Other interest income Interest expense 2 (492) (453) (464) (389) (331) (441) (450) Operating costs 16 (968) (946) (1 036) (938) (844) (634) (402) Net income from operations Share of associate companies income (28) Net income before taxation Direct and indirect taxation 17 (651) (555) (399) (266) (374) (344) (250) Net income after taxation Minority interest (100) 0 0 (7) (9) (13) (36) (17) Attributable earnings Six-year compound 30 September (audited) R million growth % Group balance sheet Assets Net advances Gross advances Impairment provisions 24 (1 117) (1 657) (1 914) (2 266) (448) (653) (315) Statutory assets, short-term deposits and cash Other assets (4) Total assets Liabilities and equity Subordinated debentures (15) Long-term loans and bonds Short-term money market funding Other liabilities (3) Total liabilities Ordinary shareholders equity Preference shareholders equity n/a Minority shareholders interest (20) Total equity (capital and reserves) Total liabilities and equity

4 we are ABIL ABIL S PURPOSE IS TO PROVIDE OUR CLIENTS WITH UNSECURED CREDIT THAT IS: purpose AFFORDABLE CONVENIENT RESPONSIBLE WE DO THIS BY: UNLOCKING ACCESS TO CREDIT THROUGH RISK INNOVATION GROWING SUCCESSFUL INITIATIVES TO MARKET DOMINANCE DRIVING DOWN THE COST OF CREDIT

5 South Africa has a largely underbanked population We strive to play a pivotal role in unlocking the provision of credit to people who lack the asset base to use secured credit. Access to responsible credit affords opportunities for improvements in the quality of life of our clients.

6 affordable TO BRING DOWN THE COST OF CREDIT

7 Striving for a low-cost model In an environment where constant adaptation is required to stay ahead, one cannot allow embedded legacy. Our focus is kept narrow and our processes are reviewed constantly to remove complexity and cost. A low-cost model enables us to offer appropriately priced products, fend off competition and make sure clients continue to choose us.

8 Committed to being a leader in the continued development of the credit market, through improved price segmentation, product innovation and simplification, competence coupled with reduced operating costs that will enable the group to drive down the cost of credit for our clients.

9 WE ACKNOWLEDGE THAT THE MARKET IN WHICH WE OPERATE WILL INEVITABLY ENTER NEW PHASES, FUELLED BY NEW COMPETITIVE ENTRANTS, AND THEREFORE OUR EARLY- MOVER ADVANTAGE WILL BE CHALLENGED ABIL believes that it will sustain its position of market leadership by providing the right choices to clients in respect of levels of service and competitive pricing, as well as flexible and innovative product offerings. In addition, we recognise that the provision of credit has a delicate balance in terms of its impact on society. In the past, a large portion of our society has survived on a wage and cash-based existence without access to financial products and credit. ABIL believes that the responsible provision of credit allows people to: HARNESS AND LEVERAGE TODAY S IDEASAND ENERGY, AND TO MAKE REPAYMENTS OUT OF THE FUTURE RESULTS OF THESE ACTIONS. MANAGE SHORT-TERM, UNPREDICTABLE AND VARIABLE EXPENDITURES AGAINST STEADY INCOME STREAMS. MAKE REALISTIC LIFESTYLE INVESTMENTS AND IMPROVEMENTS AND REPAY THESE OUT OF FUTURE INCOME STREAMS. However, we also recognise that pushed too far, this can create a future burden of overindebtedness that outweighs the benefit and utility the initial credit provides. Key to our lending process is the assessment of an individual s creditworthiness and our capability to price our products for the cost of doing business (operating expenses) and the risk of doing business (bad debts) to earn a return on assets which, geared through an appropriate capital structure, will achieve our targeted returns on equity for the providers of capital to this business.

10 resilience CREATING OUR OWN BENCHMARKS

11 Adaptability/flexibility The unsecured lending market in South Africa has a shallow history: to grow, the group has had to pioneer products, business practices and credit models. There are no benchmarks and no textbooks. We embrace and thrive on change, being challenged by the unknown and finding solutions.

12 maintaining focus TO BE NIMBLE AND ADAPTABLE, WITH SPECIFIC COMPETENCIES AND A THOROUGH UNDERSTANDING OF A FOCUSED AREA OF BUSINESS

13 Defining our purpose and our market narrowly. At ABIL, we aim for critical mass and market leadership in the sectors we target.

14 balance RESPONSIBLE IN ALL FACETS OF OUR EXISTENCE

15 Like any company, we have responsibilities to various stakeholder groups Shareholders require sustainable returns commensurate with the risk in our business and honest communication. Clients have needs and choices. Our role is to understand these needs and to satisfy them by providing the right products, at affordable prices and in a convenient way. Employees need to thrive and be motivated and incentivised to excel. Without their enthusiasm, dedication and experience, the business cannot exist. Regulators demand compliance, governance and respect for the law. Communities need to share in the prosperity they make possible.

16 TEAMWORK RESPECT ACCOUNTABILITY DIVERSITY SKILLS EXPERIENCE REWARD F UN capacity PROVIDING THE ENVIRONMENT FOR OUR PEOPLE TO EXCEL

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18 history PRIOR TO 1998, AFRICAN BANK OPERATED FOR 24 YEARS AS A SMALL COMMERCIAL BANK WITH ITS ROOTS IN, AND CONCENTRATING ON, THE HISTORICALLY DISADVANTAGED MARKET.

19 Following its acquisition by the JSE-listed Theta Group in 1998, African Bank was merged with King Finance Corporation ( King ), Unity Financial Services ( Unity ) and Alternative Finance ( Altfin ), three loan finance companies owned by the Theta Group. Non-core assets and business activities of the former African Bank were disposed of, and only the business activities relevant to the core business were retained to form the new African Bank. African Bank s original retail deposit taking and transaction banking activities were phased out. In December 1999, Theta Group Limited changed its name to African Bank Investments Limited. In August 2002, African Bank acquired the R2,8 billion Saambou personal loan book and the integration of this book into African Bank and the restructuring of competitive businesses spawned in its incubator (Nisela Growth, subsequently renamed Theta Investments) began in September For the past three years, the group has focused primarily on optimising its business model, enhancing its service offering to its clients, re-establishing appropriate growth patterns and providing its funders and shareholders with satisfactory returns. Highlights 94 Formation of investment trust with Hollard Holdings. 95 Baobab Solid Growth Limited formed through a transmuted listing into Broadacres Investments Limited and listing transferred to investment trust sector. 96 Financial services entered through the acquisitions of minority stakes in Theta Securities and King. 97 Acquired controlling interest in Altfin, King and Unity. Divested of information technology interests through listing Mustek Group. Directed the group s focus to financial services. Acquisition of balance of shares in Theta Securities. Name changed to reflect financial services focus from Baobab Solid Growth to Theta Group Limited. 98 Acquisition of 100% of African Bank Limited, enabling Theta Group Limited to become a bank controlling company. Acquisition of the minorities of Altfin, King and Unity, to form the core of African Bank Limited. Acquisition of the Boland book for R1,7 billion. 99 Divisionalisation of Altfin, King and Unity into African Bank to form one operating unit. Name changed from Theta Group Limited to African Bank Investments Limited ( ABIL ), enabling the transition to a brand-driven company, aligned to its market and African Bank brand. Acquisition of The Standard General Insurance Company Limited ( Stangen ) and reversal of captive cells into Stangen. 00 Acquisition of minorities of Nisela Growth to form the core of the Theta Investments group of companies. 01 R1,1 billion share buy-back undertaken. Formation of the African Bank Foundation. R1 billion of ABL1 bonds issued under R3,5 billion domestic medium-term note ( DMTN ) programme. 02 Acquisition of the R2,8 billion Saambou personal loan book. R425 million International Finance Corporation facility approved. 03 Credit rating upgraded to A1 (short term) and A (long term). R124 million share buy-back undertaken. R1 billion of ABL2 bonds issued. Special dividend of 100 cents per share declared. 04 Theta Investments businesses largely divisionalised into African Bank. Credit rating upgraded to A1 (short term) and A (long term). R1 billion of ABL3 bonds issued. Special dividend of 53 cents per share declared. 05 R600 million black equity ownership programme announced. Credit Indemnity integrated into African Bank. R1 billion ABL1 bonds repaid. R800 million of ABL4 bonds issued. Special dividends of 100 cents per share declared. Balance of Teba Credit joint venture purchased. Commercial Vehicle Finance division sold. R500 million, non-redeemable, non-cumulative, non-participating preference shares issued.

20 inside Up front Financial features, financial highlights and financial history Booklet Purpose and focus The year under review 4 Letter to stakeholders 12 Strategic review 18 Financial review 36 Stakeholder review The 2005 annual report does not contain a notice of the annual general meeting. Shareholders will be notified of the meeting date and the matters to be dealt with at the meeting in a separate document. Accountability report 64 Board of directors 66 Corporate governance 76 Remuneration report 86 Risk management 90 Major group risks 94 Annual financial statements Shareholder information 154 Dividend declaration 155 Shareholders diary 155 Listing information 156 JSE statistics 157 Shareholders profile

21 contents As part of our strategic process over the past year, we reaffirmed and evolved our central purpose to provide credit that is: affordable, convenient and responsible. The year under review the substance of good corporate governance is more important than its form; adoption of a set of rules or principles or of any particular practice or policy is not a substitute for, and does not itself assure, good corporate governance Accountability report The annual financial statements are prepared in accordance with South African Statements of Generally Accepted Accounting Practice and incorporate responsible disclosures in line with the accounting philosophy of the group. Annual financial statements The group is committed to business integrity, transparency and professionalism in all its activities to ensure that all the entities within the group are managed ethically and responsibly to enhance the value of its business for the benefit of all stakeholders. Shareholder information

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23 LETTER TO STAKEHOLDERS STRATEGIC REVIEW FINANCIAL REVIEW STAKEHOLDER REVIEW THE YEAR UNDER REVIEW 01 Year under review As part of our strategic process over the past year, we reaffirmed and evolved our central purpose to provide credit that is affordable, convenient and responsible. 3

24 THE YEAR UNDER REVIEW LETTER TO STAKEHOLDERS interaction INTRODUCTION The ABIL group is pleased to look back on 2005 as the year where we were able to demonstrate tangible examples of our efforts to become customer-centric. As part of our strategic process over the past year, we reaffirmed and evolved our central purpose to provide credit that is affordable, convenient and responsible. A purpose, however, to be meaningful, has to manifest itself in actions day by day, and what follows is an account of the progress we have made this year. Affordable Over the past two years, ABIL has been reducing its operational and funding costs to enable the group to pass the cost savings to clients. In August 2005, the following price-reduction initiatives were introduced: administration fees are split between an upfront charge and a monthly charge; and insurance premiums are charged monthly as opposed to an upfront charge. These initiatives effectively lower the outstanding amount on which the client pays interest and therefore lower the amount of interest charged. The most important pricereduction initiative, however, has been the introduction of our risk segmented pricing models that have substantially brought down the interest rates charged for most of our clients. Convenient Over the past year, ABIL implemented a variety of strategies to make it easier for clients to transact with us. The group: expanded its distribution network to get closer to the client; introduced a broader range of products to provide more choice; created electronic access to loans via the internet for clients who lack the time to go to a branch; implemented a new front-end system to streamline the application process; and significantly reduced turnaround time from loan application to disbursement. Responsible Our segmentation strategies and enhanced scoring models give us better insight into clients affordability, while our consumer pledge (announced and reported last year) was rolled out to branches this year, promising full disclosure, respect for privacy, giving clients loans they can afford to repay and resolving queries quickly and efficiently, among others. We made good progress in establishing partnerships to promote financial literacy in our market and the benefits will be evident in increased understanding, informed decision making and greater individual responsibility for financial security. In recent years, much attention has been given to entrenching ABIL in its dominant position in the unsecured credit market, which will become increasingly competitive. Our progress is reflected in our inclusion for the second year in the JSE Socially Responsible Investments Index, which assesses companies on an increasingly stringent and broad range of economic, social and environmental indicators. We also ranked well among financial services companies in independent biannual perception surveys among fund managers, analysts and journalists. GOVERNANCE ABIL will continue to uphold the highest standards of corporate governance. It is committed to business integrity, transparency and professionalism in all its activities to ensure that it acts ethically and responsibly to enhance the value of its business for the benefit of all stakeholders. We appreciate the Deloitte Good Governance Awards nomination we received for the second year in a row. 4

25 LENGOLO HO BATHAHASELLI BA KGWEBO tshebeletsano SELELEKELA Khamphani ya ABIL e motlotlo ho sheba morao 2005 e le selemo seo ka sona re kgonneng ho bontsha mehlala e hlakileng ya nnete ya boikgathatso ba rona ho ba baatamedi-ba-bareki. E le karolo ya tswelopele ya moralo hodima selemo se fetileng, re netefatsa hape le ho tswelapele hanyane-hanyane lebaka la rona bohareng la ho fana ka sekoloto ke hore: kgoneho, e lokelang le boikarabelo. Morero leha hole jwalo, hore o fane ka molemo o lokela ho iponahatsa ka mesebetsi, mme se latelang ke tlhaloso ya kgatelopele eo re e fihletseng selemong sena. Kgoneho Hodima dilemo tse pedi tse fetileng, ABIL e fokoditse tsela ya yona le ditshenyehelo tsa ditjhelete ho etsa hore khamphane e fete phokotso ya ditshenyehelo ho bareki. Ka Phato 2005, dinyehlisetso tse latelang tsa maikgathatso a theko tsa hlahiswa: ditefello tsa tsamaiso tsa arolwa pakeng tsa tefo ya nnete le tefo ya kgwedi le kgwedi ditefello tsa kgwedi le kgwedi tsa inshorense di lefellwa kgwedi le kgwedi jwalokaha di nganyisana le tefo ya nnete. Maikgathatso a mabedi ana ka matla a theotse karolo ya ditjhelete e setseng eo moreki a e lefellang phaello mme kahona e theola tefo ya tjhelete ya phaello. Boikgathatso ba bohlokwahadi ba dinyehlisetso-tsa-theko, leha hole jwalo, e hlahisitswe karolong ya rona e kotsi ya dimmotlolo tsa theko eo ka nnete e tutletseng tlase sekgahla sa ditefello tsa phaello bakeng sa boholo ba bareki ba rona. E lokelang Hodima selemo se fetileng, ABIL e kentse tshebetsong meralo e fapa-fapaneng ho nolofaletsa bareki ho etsa tsamaiso ya kgwebo le rona. Khamphane: e atolotse kabelano ya kgokahanyo ya yona ho atamela moreki, e hlahisitse ka bophara bokgoni ba dihlahiswa ho fana ka kgetho e pharaletseng, e entse mokgwa wa kgoneho wa motlakase kadimong ya ditjhelete ka internete bakeng sa bareki ba se nang nako ya ho ya lekaleng, e kentse karolo e ntjha ya porojeke ho ntlafatsa tshebetso ya kopo hape ka bohlokwa ho fokotsa nako ya taolla ya mangolo a kopo ya tjhelete ho patala. Ka boikarabelo Karolo ya moralo wa rona le ntlha ya dimmotlolo e ntlafaditsweng e re fa ponelo e molemo ho kgoneho ya moreki, ha tshepiso ya bareki ba rona (e hlahisitswe le ho tlalehwa selemong se fetileng) ene e ipheta-pheta makaleng selemong sena, e tshepisa diqeto tse tletseng, tlootlo e poraebete ho fa bareki kadimo ya tjhelete eo ba ka kgonang ho e lefa le ho rarolla ditletlebo ka pele ka nako, mahareng a bona. Re entse tswelopele e babatsehang ka ho etsa baikopanyi ho nyolla dipalo tsa ditjhelete marakeng wa rona mme melemo e tla ba bopaki ho keketso ya diqeto tse hlophilweng le boikarabello ho motho ka mong bakeng sa tshireletso ya tjhelete. Dilemong tsa jwale, tsotello e kgolo e filwe tshireletso ABIL boemong bo boholo ba yona marakeng wa sekoloto o sa tshireletsehang o tla phahama ka tlhodisano. Kgatelopele ya rona e bonahala kenellong ya rona ya selemo sa bobedi ho JSE Socially Responsible Investments Index, e shebang dikhamphane boemong bo tiileng bo phahameng le bokgoni bo pharaletseng ba moruo, phedisano le babontsi ba tikoloho. Re bile re eme hantle hara dikhamphane tsa ditshebeletso tsa ditjhelete mohopolong wa tjhebo ka ho se ikemele habedi ka selemo hara baokamedi ba ditjhelete, bahlopholli le baqolotsi ba ditaba. 5

26 LETTER TO STAKEHOLDERS (continued) ECONOMIC EMPOWERMENT As a retail business that targets a large cross-section of the economy, ABIL employs and transacts with a broad base of individuals, most of whom are not exposed to empowerment opportunities. During the year we achieved an important milestone when we announced concrete steps to a broad-based equity empowerment structure for our group. Eyomhlaba In May 2005, we announced a black equity ownership programme that will initially place 6,5% of ABIL s ordinary share capital in the hands of a broad base of historically disadvantaged black people. The programme has been structured to give these individuals the opportunity to acquire shares in ABIL through the limited purpose vehicle, Eyomhlaba Investment Holdings Limited (Eyomhlaba). It is designed to increase the initial holding to over 15% over ten years, of which 10% will be unencumbered, although there is no limitation on the eventual direct black shareholding. It is focused on people closely associated with ABIL including management, employees, clients and existing small shareholders. The closer the association, the more heavily discounted the share purchase price from 85% for employees to 60% for members of the public. The equity plan is expected to benefit thousands of people and will be financed in three parts: the issue by ABIL of 21,2 million shares worth R350 million, the Eyomhlaba capital raising from participants and R150 million in senior preference share funding from Rand Merchant Bank and Barclays. Shareholders approved the issue of 20 million ABIL shares to Eyomhlaba in August Eyomhlaba acquired an additional 5,4 million ABIL shares in the open market prior to 30 September It issued a prospectus to invite participants to subscribe for shares in the programme. The offer will be open to 11 January 2006 and the results of the offer will be announced and participants notified shortly thereafter. Full details and progress reports of the Eyomhlaba programme are available on FINANCIAL SECTOR CHARTER ABIL is a signatory to the financial sector charter and the financial summit agreement, which are intended to facilitate transformation, empowerment and access to financial services across the spectrum of South Africans. For ABIL, progress on transformation and empowerment, within and beyond legislation, is intrinsic to our sustainability and growth and is closely monitored: ABIL currently has a loan book comprising 1,4 million loans. An estimated 90% of our client base comprises black people, and loans granted span all nine provinces of South Africa. Our loans provide access to incremental housing finance that is improving the living conditions of thousands of South Africans. Independent surveys confirm that approximately 16% of these loans are used for incremental housing construction and home improvement. Among our own people, ABIL s development strategy is on track, with the proportion of black people in management (2008 target in brackets) now at: 25% of executive directors (25%) 12,5% of senior management (20%) 27,1% of middle management (30%) 34,1% of junior management (40%) Our procurement policy for discretionary spending is geared to empowered suppliers. In the review period, this amounted to 46% of measurable discretionary expenditure or R163,5 million. For the review period, grants made by the African Bank Foundation amounted to R5,7 million. Given that ABIL s social support is generally beyond a 12-month horizon, since 2003 ABIL has invested R17,8 million in social projects focused on self-sufficiency, education and entrepreneurship. ECONOMY The economic environment over the review period was again favourable for ABIL s operations. Against a backdrop of low inflation and continued growth internationally, the economy which was bolstered by increased perceptions of fiscal sustainability and monetary policy credibility continued an expansion that has become 6

27 LENGOLO HO BATHAHASELLI BA KGWEBO (continued) PUSO ABIL e tla tswelapele ho tswhara boemo bo hodimo ba puso ya tlamahano. E itlamme boikemelong ba kgwebo, ponaletso le botsebi mesebetsing yohle ya yona ho netefatsa hore e ya sebetsa kamanong le boikarabello ho etsa haholo boleng ba kgwebo molemong wa bathahaselli bohle ba kgwebo. Ka hona re amohela ka monyaka kgetho eo re e fumaneng selemong sa bobedi ka tatelano ya Deloitte Good Governance Awards. NTLAFATSO YA MORUO Jwaloka kgwebo e nyane e shebileng ho arola haholo ka lehare hwa moruo, ABIL e a hira ebile e tswelapele kgwebong ka ho pharalla ha motho ka mong haholo ba sa iphatlalatsang ho menyetla ya ntlafatso. Ka nako ya selemo re atlehile ho fumana ketsahalo ya bohlokwa ha re thonya mekgahlelo ya nnete ho tlhopho ya ntlafatso ya tekatekanyo ya pharallo bakeng sa khamphane ya rona. Eyomhlaba Ka Motshehanong 2005, re thontse lenaneo la bona la tekatekanyo ya batho-batsho leo ka molao le tla beha 6,5% ya diabo tse tlwaelehileng tsa mantlha tsa ABIL matsohong a bopharallo ba nalaneng ya Ma Afrika Borwa a fumanehileng. Lenaneo lena le hlophetswe ho fa bana ka bongwe monyetla ho fumana diabo ka ABIL ka mabaka a itekanetseng, Eyomhlaba Investment Holdings Limited ( Eyomhlaba ). E reretswe ho nyolla thepa ya pele ka hodima 15% hodima dilemo tse leshome, leha ele hore ha hona ditekanyo ka nako e sa bolelwang malebana le seabo sa bathobatsho mme e tsepame ho batho ba imatahantseng haufi le ABIL, ho kenyeletsa botsamaisi, basebetsi, bareki le beng ba diabo ba banyenyane ba seng ba ntse ba le teng. Ho ba haufi ha mokgatlo, ke ha dinyehliso tse boima eba karolo tsa ditheko-ho tloha ho 85% bakeng sa basebetsi ya ho 60% bakeng ho sa ditho tse tsebahalang. Moralo wa teketekano o lebeletswe ho tswela molemo batho ba dikete mme e tla lefellwa ka dikarolo tse tharo: taba ya ABIL ya diabo tse dimillione tse 21,2 tse ka lekangwang le dimillione tse R350, Eyomhlaba e entseng ho tloha ho bakenedi le dimillione tse 150 kgethong e ka hodimo ya tjhelete ya seabo ho tloha Rand Merchant Bank le Barclays. Beng ba diabo ba dumellane ka taba ya dimillione tse 20 tsa diabo tsa ABIL ho Eyomhlaba ka Phato Eyomhlaba ya fumana keketso ya dimillione tse 5,4 ele diabo tsa ABIL marakeng o lokolohileng pele ho la 30 Lwetse E ntshitse lenaneo ho mema bakenedi bohle ho ingodisetsa diabo lenaneong. Monyetla o tla bulwa ho fiha ka la 11 Pherekgong 2006 mme diphetho di tla phatlalatswa mme bakenedi ba tla phatlalatswa ha kgutshwanyane kamorao ho moo. Boitsebiso ka botlalo tlaleho e tswellang ya lenaneo la Eyomhlaba le hlahang sebaka se kgethehileng sena KAROLO YA DITJHELETE YA KGIRO ABIL e a tekena le yona karolong ya ditjhelete ya kgiro le tumellano ya ditjhelete e tlhorong, eo e rerang ho tiisa phetoho, ntlafatso le kgoneho ho ditshebediso tsa ditjhelete ho tswella le mesebetsi yohle ya MaAfrika Borwa. Bakeng sa ABIL, kgatelopele phetohong le ntlafatsong, ka hare le ka morao ha molao, ke molao boteng le kgolo mme e beilwe leihlo: ABIL ha utshwanyane ena le buka ya dikadimo tsa ditjhelete e kentseng dimillione tse 1,4 tsa dikadimo tsa ditjhelete. Kgakanyo ya 90% ya bareki ba rona e itshetlehile ho batho-batsho, mme dikadimo di fanwa ka ho fihlella diporofinse tsena tse robong tsa Africa Borwa. Dikadimo tsa rona di fana ka bokgoni ho nyollo ya tjhelete ya matlo e tswellisang pele maemo a bophelo a diketekete tsa MaAfrika Borwa. Bashebi ba ikemetseng ba tiisa hore bonyane 16% ya dikadimo tsena di sebedisetswe ho qalwa ha phahamo ya matlo le mahae a phetseng. Hara batho ba rona, tlhopho ya ntshetsopele ya ABIL e motjheng, ka karolo ya bathobatsho tsamaisong hona jwale ka (2008 sepheo ka masakaneng): 25% ya tsamaiso ya baokamedi (25%) 12,5% ya tsamaiso e boholong (20%) 27,1% ya tsamaiso e mahareng (30%) 34,1% ya tsamaiso e nnyane (40%) Leano la rona la ho reka bakeng sa kahlolo ya ditshenyehelo ke thepa ho ntlafatso ya baabi. Ka nako e shebilweng, ena e isa 7

28 LETTER TO STAKEHOLDERS (continued) the longest in recorded South African economic history. Domestic demand has remained the primary driver of the current upswing. With nominal wage increases exceeding the rate of inflation, consumers experienced real increases in disposable income and have further benefited from tax relief, higher levels of employment and increased Government welfare payments. With these and other factors propelling consumer confidence to record levels and low interest rates constraining debt-service costs, consumers continued to increase their use of credit, with little indication of credit overextension. FINANCIAL RESULTS The prevailing economic environment has contributed to the performance of ABIL s businesses. In combination with a tightened operating focus and improvements across the key drivers of the business, the group delivered its targeted return on equity for shareholders. Headline earnings per share were up 25% at 202,7 cents (2004: 161,6 cents) and fully diluted headline earnings up 30% at 201,9 cents (2004: 155,7 cents). Return on equity improved to 39,4% (2004: 31,3%). Return on assets increased to 13,0% (2004: 11,6%). The ABIL board declared a final ordinary dividend of 70 cents per share. This ordinary dividend is covered 1,6 times by attributable earnings. The group also declared a special dividend of 30 cents per share (in line with its communicated strategy of paying back capital released from the pay down books) and a preference share dividend of 361 cents. This brings total ordinary dividends paid to 222 cents and preference dividends paid to 530 cents per share for the year. REGULATORY DEVELOPMENTS There has been much debate and comment on proposed regulations in the financial services sector, particularly the national credit bill and National Payment System Act. In their proposed formats, these will significantly alter the competitive landscape in our industry. ABIL fully supports the intentions embodied in these regulations and has been an active participant in their formulation. Our proactive and co-operative approach is detailed in the strategic review on page 12. PROGRESS ON SUSTAINABILITY ABIL continues to make progress in embracing sustainability and integrating it more effectively into our activities. A dedicated sustainability team and manager have refined our strategy and framework, and are implementing measures that go beyond legal compliance. Our 2004 sustainable development report received an excellent rating in the inaugural Ernst & Young sustainability awards. Our approach, progress and challenges are detailed in the stakeholder review beginning on page 36. APPRECIATION The markets in which ABIL is active are competitive, changing and fragmented. This poses significant challenges as we position the business for sustainable long-term growth. Our people have again met these challenges with fortitude and commitment during On behalf of the board, I thank every one of you, and particularly the management team who set the tone daily. In turn, we will continue to create a working environment in which you can reach your full potential and be rewarded appropriately. A special word of appreciation must go to our shareholders who have entrusted their wealth to us to manage and grow. We are grateful for the confidence you have placed in us. We greatly value the counsel and contribution of the members of our board and the strong relationships we are building with the authorities. The trust and continued support of our many clients is the bedrock of our business. We will continue to show our appreciation of this loyalty by meeting your financial needs with innovative products, superior service and competitive rates. LOOKING AHEAD The group is committed to its vision of unlocking access to credit through risk innovation while driving down the cost of credit for its clients. This will be achieved by extracting cost benefits through the growth of our critical mass businesses to market dominance. The 2005 financial year has been one in which some of the strategies to achieving this vision have been put in place. 8

29 LENGOLO HO BATHAHASELLI BA KGWEBO (continued) ho 46% tsa tekanyo ya kahlolo ya ditshenyehelo kapa R163,5 millione. Ka African Bank Foundation, ABIL e fihletse karolo ya ditjhelete ya kgiro ya 0,5% ya tsamaiso ya phaello ya lekgetho la poso diporojekeng tsa setjhaba. Nakong ena e shebilweng, yona ya etsa diranta tse dimillione 5,7. Phanong eo ya tshehetso ya setjhaba ya ABIL ka kakaretso e ka mora dikgwedi tse 12 ka tjhebeho, ho tloha 2003, ABIL e tsetetse dimillione tse 17,8 diporojekeng tsa setjhaba tse tsepameng ho boiphediso, thuto le dikgwebo tse nnyane. MORUO Dikoloho e moruo hodima nako e seng e shebillwe hape e ne e ratwa bakeng sa mesebetsi ya ABIL. Kgahlanong le moruo o tlase o nyehlang o ntseng o theoha mme o tswelapele ho hola dinaheng tsa matjhaba, moruo-oo oileng wa tshehetsa ka kgopolo e hodimo ya tjhelete ya mmuso e ntseng e le teng tshebetsong le ho isa leihlo leanong le matla-ho tswellisapele bonamallo bo bileng botelele tlalehong ya nalane ya moruo wa Afrika Borwa. Ditlhoko tsa hae di setse ele mokganni wa mantlha wa phahamo. Malebana le nyollo ya moputso ho fihlela sekgahla sa ho wa ha moruo, baji ba bone phahamo e le ka nnete tahlong ya tjhelete e kenang mme ba be le melemo e fetang ho tswa lekgethong, maemo a hodimo a kgiro le keketso ya boiketlo ba patala ya mmuso. Ka mabaka ana le a mang a kenyang boitshepo ba moreki ho mekato ya ditlaleho le sekgahla sa tswala ho qobella tshebetso ya kopano ya tshebediso ya mokoloto, bareki ba tswelapele ho phahamisa tshebediso ya bona ya sekoloto, leha ele hore ke dipontsho tse nyane tsa sekoloto kahodima keketso ya nako. SEPHETHO SA DITJHELETE Tikoloho e moruo o tlwaelehileng e tlatseditse karolong ya dikgwebo tsa ABIL. Kopanong le tsepamo e tiileng ya tshebetso le dintlafatso ho pota baqadi ba kgwebo, khamphane e tlisitse ho kgutla ha tjhebelo ya yona tekatekanong bakeng sa beng ba diabo. Dipatala tsa dihlooho seabo ka seabo di ne di fihla ho 25% ho 202,7 disente (2004: 161,6 disente) le dipatala tse tletseng ho fihla ho 30% ho 201,9 disente. Ho kgutlela ho tekatekano e ntlafaditsweng ho 39,4% (2004: 31,3%). Ho kgutlela ho thepa ya kgwebo e ekeditsweng ho 13,0% (2004: 11,6%). Boto ya ABIL e hlakotse phano ya tjhelete ya ho qetela ka 70 disente ka seabo. Phano ena e akareditse makgetlo a 1,6 ka ho isa ho dipatala. Khamphane hape ya hlakola kabo e kgethehileng ya ditjhelete tsa phaello ya 30 disente (tseleng le tlhopho ya yona e buisanweng ya ho patala tjhelete ya mantlha ya ho qala kgwebo e tlositsweng dibukeng tse sa qetwang ho lefellwa) mme seabo sa pele sa kabo ya ditjhelete tsa phaello sa 361 disente. Hona ho fana ka kakaretso ya ditjhelete tse patetsweng ho 222 disente le patala ya pele ho 530 disente ya selemo. DINTLAFATSO TSA KAMEHLA Ho bile le puisano e telele le ditletlebo ho melao e seng e behilwe karolong ya ditshebediso tsa ditjhelete, ka ho khetheha national credit bill le National Payment System Act. Kopong ya bona ya meralo, tsena ele ka nnete di etsa phetoho ya tlhodisano ya ho fumana mosebetsi o motjha industering. ABIL ka botlalo e tshehetsa maikutlo a potilweng melawaneng ena mme e bile e mong ya sehlahlo qalong ya bona. Ho shebana ha rona le bothata bona pele le katamelo ya tshebedisano mmoho e keneletse moralong oo shebilweng ho 12. TSWELOPELE E TSWELLANG ABIL e tswella ho etsa tswelopele ho aheletsa tswello le ho e kopanya ho feta ka matla mesebetsing ya rona. Mokgupi wa tswello o itlammeng le mookamedi ba hlwekisitse moralo wa rona le moralo wa mathomo, mme ba kenya tshebetsong dikarolo hore di tlole takatso tsa molao. Tlaleho ya rona ya ntshetsopele ya nako e telele ya selemo sa 2004 e ipapabotse phanong ya dikgau tsa Ernst & Young tsa ntshetsopele ya nako e telele. Katamelo ya rona, kgatelopele le diphepetso di fumaneha ka botlalo tlalehong e qalang leqepheng la 36. DITEBOHO Mebaraka eo ABIL e leng hlwahlwa ho yona e bontsha tlhodisano, phetoho le kabo ho batho kaofela. Sena se tlisa diphepetso jwalo ka ha re beha kgwebo maemong a kgolo ya nako e telele. Batho ba rona ba fetile diphepetsong tsena ka mamello le boitelo selemong sa Lebitsong la boto, ke rata ho leboha bohle haholo sehlopha sa tsamaiso se ileng sa 9

30 LETTER TO STAKEHOLDERS (continued) The 2006 financial year will see a continuation of this process with particular emphasis on the following: Using the risk-based pricing model to test the relationship between price, volume and risk inherent in our business model. We believe we can responsibly grow credit extension by implementing appropriate changes in pricing and measuring the rate at which incremental volume (and therefore cost) benefits exceed incremental risk increases. In addition, the continued reduction in price cross-subsidisation should further entrench the group s market leadership. Expanding the distribution network and innovating new products, notably the credit card initiative. Being ready to adopt the national credit bill ahead of its implementation to minimise business and client disruption. The group believes it is capable of achieving these objectives and building a strong and sustainable business into the long term. ABIL is confident it will achieve all its stated financial objectives and, more importantly, continue to create shareholder value by growing its economic profit in excess of its medium-term target of CPI plus 15% for ACCOLADES ABIL was included in the JSE SRI Index for a second year Rated 38th in the top 185 companies in Financial Mail s Top Empowerment Companies ABIL achieved seventh place in the Ernst & Young Excellence in Financial Reporting of the top 100 companies listed on the JSE ABIL was highly commended in the Grand prix for best overall investor relations non-ftse/jse top 40 by IR magazine s South African investor relations awards ABIL was voted the leader in corporate reporting in the sector financial: general in the Investment Analyst Society s Best reporting and communication awards The group received a commendation for the articulation of its sustainability challenges in the ACCA South Africa Awards for Sustainability Reporting 2004 Our stakeholder review 2004 was awarded an excellent rating in the first Ernst & Young Excellence in Sustainability Reporting Awards ABIL was a finalist for the second year for the Deloitte Good Governance Awards 10

31 LENGOLO HO BATHAHASELLI BA KGWEBO (continued) DIKGAU LE HO TLOTLWA ABIL e kenyeleditswe dipalong tsa thekiso tsa JSE SRI kgetlong la bobedi E boetse e behilwe maemong a 38 a khamphaneng tse 185 tse ka hodimo ke koranta ya Financial Mail ABIL e fumane boemo ba bosupa ho Ernst & Young ka ho ipabola ka Excellence in Financial reporting ho khamphane tse 100 tse ka hodimo tse behilweng JSE ABIL e ile ya thoholetswa haholo mane ho Grand prix for best overall investor relations non- FTSE/JSE top 40 ke IR, makazine oa Afrika Borwa o fanang ka dikgau tsa matsete ABIL e kgethilwe e le khamphane e itlhommeng pele botlalehing bo kopanetsweng mane ho sector Financial: general Khamphane e boetse e fumane thoholetso ka ho kenya tshebetsong matsapa a diphepetso tsa kgwebo ya nako e telele ho ACCA, e leng setsi se shebaneng le ditlaleho tsa nako e telele tsa 2004 Tlaleho ya rona ya tsa kgwebo ya nako e telele e fuwe boemo bo botle ho Ernst & Young bakeng sa kgau ya tlaleho e hlwahlwa ya kgwebo ya nako e telele ABIL e thonyeditswe Kgau ya Deloitte ya Taolo e Nepahetseng (Good Governance Award) selemo sa bobedi jwale. re tsosa molota letsatsi le letsatsi. Ka mokgwa o tshwanang re tla tswela pele ho etsa sebaka sa tshebetso, se tla etsa hore bohle ba sebetse ho fihlela bokgoni ba bona mme ba tsebe ho lefshwa hantle. Diteboho tse kgethehileng di lokela ho ya ho ba nang le diabo kgwebong ya rona, ba tsetetseng matlotlo a bona ho rona ho re tsamaisa le ho re hodisa. Re motlotlo ka lona ka tshepo eo le e behileng ho rona. Re lebohela boeletsi le ditlatsetso tsa ditho tsa boto ya rona mmoho le dikamano tse mofuthu tseo re di thehileng le beng ba rona. Tshepo le tshehetso e tswellang pele ya boholo ba bareki ba rona ke tshiya ya motheo kgwebong ya rona. Re tla nne re tswele pele ho bontsha thoholetso ya rona ya botshepehi bona ka ho fihlela ditlhoko tsa ditjhelete ka dihlahiswa tsa boemo bo phahameng, tshebeletso e hodimo le maemo a ka emelang ditlhodisano. TJHEBELOPELE Khamphane e ikitlaeletsa ponelopele ya yona ya hore ho fihlelwe ditjhelete ka ho tlisa mekgwa e metjha ya tshebetso mme ka hlakoreng le leng e le ho fokotsa ditjeo tsa mekoloto bakeng sa bareki ba yona. Sena se tla fihlelwa ka ho ntsha ditshenyehelo tsa kgolo ya sekgahla sa kgwebo sa boholo ba dikgwebo ho fokotsa ho ba ka hodimo ho mebaraka. Selemo sa ditjhelete sa 2005 e bile seo a mang a mawala a ho tlisa ponelopele ena a ileng ya kenngwa tshebetsong. Selemong sa ditjhelete sa 2006 re tla ntshetsapele tshebetso ena mme kgatello e tla behwa ho tse latelang: Tshebediso ya maemo a ho ipeha tsietsing a ho beha ditheko le ho hlahloba dikamano dipakeng tsa theko, bophahamo le ho kenya tshebetsong mokgwa ona wa ho ipeha kotsing kwebong ya rona. Khamphane e dumela hore e tla hola ka boikarabelo ho matlafatsa kgolo ya ditjhelete ka ho kenya tshebetsong diphetoho pehong ya ditheko le ho metha sekgahla sa kgolo ya ditjeo se fetang kgolo ya maemo a ho ipeha tsietsing. Ho feta mona, phokotso e tswellang pele dithekong tse lokela ntlafatso ho itlhlomapele ha khamphane ya rona mebarakeng. Kgodiso ya marangrang a kabo le boqapi ba dihlahiswa tse ntjha, haholo tshebetso ya dikarete tsa tjhelete. Ho ba malala-a-laotswe ho kenya tshebetsong bili ya naha ya ditjhelete pele yona e ka hla ya kenngwa tshebetsong e le hore ho bebofatswe tshitiso kgwebong le ho bareki ba rona. Khamphane e dumela hore e na le bokgoni ba ho fihlela dipheo tsena le ho aha kgwebo e matla e tla phela nako e telele. ABIL e na le tshepo ya hore e tla fihlela dipheo tsena tsohle tse bontshitsweng kahodimo, mme e bile sa bohlokwa ke ho tswela pele ho phahamisa boleng ba dishere ka ho nyolla phahello ya moruo ka bongata ba pehelo e mahareng ya CPI mmoho le 15% bakeng sa

32 STRATEGIC REVIEW focus THE REGULATORY ENVIRONMENT ABIL operates in an environment that is regulated on multiple levels through various bodies of oversight. The group complies with regulations from the South African Reserve Bank (SARB), the JSE Limited, the Micro Finance Regulatory Council and the Financial Services Board, among others. New legislation (the national credit bill) and some consequential changes to other legislation (the National Payments System Act) are expected to impact on the activities of the group and the competitive environment in which it operates over the medium term. We have noted progress with the national credit bill, which will replace all existing credit legislation, in recent reporting periods. The bill entered the parliamentary process during June this year and could become law in the second quarter of The group will continue to engage with the relevant authorities once the process of consultation on regulations under the bill commences in earnest. ABIL has already implemented a number of changes that align its practices with the proposed bill. These include changes to the way it charges administration fees on its loans as well as insurance premiums levied on its credit life policies. The graph below was produced from data gathered for the Department of Trade and Industry as part of the research done in preparation for the pending national credit bill. The graph depicts the total cost of credit (interest rates and fees) charged by different credit providers, including banks, retailers and other. ABIL s rates have been superimposed to indicate our relative positioning. The risk-based segmentation model implemented during the year minimises crosssubsidisation and allows the group to price clients accurately for their particular risk profile. It also provides the necessary flexibility to adjust product offerings to take into account price caps that may be introduced as part of the national credit bill. Given that ABIL operates in the middle market in terms of its pricing, the group is comfortable that it should be able to adapt to a rational price cap structure without undue disruption to its business. The final impact of the bill will only become clear once regulations have been published and some of the market consequences in terms of credit provider and consumer behaviour, and interpretations of the law by the courts, have had time to manifest. As previously reported, ABIL has engaged intensively on issues affecting the group in the bill, directly with the Department of Trade and Industry as well as through the banking industry process with the department and the parliamentary portfolio committee. Amendments made to the bill to date reflect responsiveness on the part of the department and the portfolio committee to industry concerns. Total cost of credit (including administration fees) 400% 350% 300% 250% 200% 150% 100% 50% 0% 0 Exempt credit ABIL s main focus Usury credit Months Source: Research carried out by dti in relation to national credit bill and internal sources 12

33 The new dispensation offers significant benefits through the removal in the present exemption notice of both the arbitrary R loan-size limit and the exclusion of products such as revolving facilities and credit cards. This will allow ABIL to offer a broader range of products and significantly reduce the cost of engaging with a client over the longer term. The bill also substantially levels the competitive playing field in the credit industry, which bodes well for improved competition. Preparations are on track to ensure timeous compliance with the new law and capitalise fully on the opportunities it offers. Consequential amendments to the National Payments System Act will outlaw the manipulation of any payments system that allows preferential treatment of any beneficiary over others. SARB is also phasing out sortingat-source arrangements (where users submit electronic debits directly to issuing banks, rather than through the central clearing system). These changes will affect the present electronic debit order arrangements used by ABIL with three of the four major banks. Once in force, all electronic debits will have to be processed through the central payments clearing system (Bankserve) and issuing banks will be obliged to treat all debits in a payment system equally (including intra-bank transactions). ABIL supports the principle of a level playing field for all participants in the payment system. Regulations will allow for existing business on present arrangements to pay down on these platforms until an agreed date, to ensure an orderly transition and maintain prudent risk management. STRATEGIC CONTEXT The strategic context in which we operated during the year was characterised by these changing regulatory and competitive environments and a buoyant credit market. As previously communicated, the regulatory changes and less benign competitive environment we expect in the short to medium term have the potential to manifest in one or more of the following areas: margin pressure, constrained asset growth, challenging collections processes and credit quality. Given this scenario, we articulated six strategic responses to focus on in 2005 and beyond: A lowest-cost model A growth strategy Client-centricity Development of human capital Improved credit and collections competence Improving technology capabilities We discuss our progress to date and initiatives planned for 2006 below. LOWEST-COST MODEL AND BUSINESS OPTIMISATION Our main focus in achieving our cost targets this year was on centralising support services, optimising the distribution channel and optimising business processes. The plan developed in 2004 to enhance positioning and optimise distribution in terms of both costs and market penetration was implemented this year. During 2005, we merged 27, closed 12 and opened 22 new branches, closed 12 mobile sales offices and integrated 10 more into the branch network. All regional offices were closed. In terms of centralising support services, all back-office services of African Bank and Credit Indemnity were integrated and collapsed into the newly established group shared services cluster; incorporating human resources, information technology, finance, credit and collections. Sales, marketing and distribution for the two entities were also integrated into one team. The integration included the implementation of a common IT front-end, back-end and wide area network to facilitate better use of infrastructure, better servicing of clients and improved MIS and data management capability. We expect that African Bank Miners Credit will be similarly integrated during 2006, as soon as the Teba Credit acquisition has been fully bedded down. The third business optimisation initiative was to streamline and improve the effectiveness and efficiency of key processes. Accordingly, we introduced the 6-Sigma methodology into the business to focus on the following important areas of client service, business processes and cost drivers: Loan acquisition, processing and disbursement process Client query resolution process Mobile sales process (including structure, training and development and remuneration) Channel-mix optimisation (mobile sales and branch networks) 13