FirstRand Limited (FSR) Earnings Call Transcript & Summary

Right. Let's begin. Good morning, everybody, and welcome to FirstRand's Half Year Results for the 6 Months Ended December 31, 2020. The group metrics on Slide 2 reflect performance against a prepandemic base. So if we run through some of those highlights, normalized earnings, you can see, declined 21% to come in at ZAR 11 billion. Preprovision operating profit, a touch lower at ZAR 25 billion and then point of -- point-in-time return on equity coming in at 15.6%. And pleasingly, we were able to continue to grow our net asset value for the group. So that track record remains in place. Operating leverage, a little bit weaker given the environment. And we are very pleased to have maintained our core equity Tier 1 ratio over this period. And you can see relative to the comparative, it has stayed the same. We're delighted, of course, to have resumed declaring our dividends and so we have declared an interim dividend of ZAR 1.10 per share, that takes us to the bottom end of our target payout range of 1.8x. In the remainder of the presentation this morning, we are going to tease out the rolling 6-month performance wherever we can in order to present a much more meaningful picture of the business and the earnings rebound. Moving on to Slide 3, we can see the performance at a per-share level on a rolling 6-month basis. And the sharp rebound in earnings from the 6 months to 30 June 2020 is clearly evident. On the left-hand side of Slide 4, we reflect our generation of economic profit. That is our accounting profit after deducting a charge for the cost of capital, which in itself has increased relative to the previous period. So we are very pleased to have generated a smidgen of economic profit in this period. Again, the positive trend in ROE is evident on a rolling 6-month basis. And on the right-hand side, we depict our growth in NAV per share increasing 6% relative to our financial year-end. Moving on to Slide 5, you will recall from our year-end results presentation, the hymn sheet that we crafted for our businesses. We realized that the operating environment had changed materially, and we needed a response framework to navigate through the challenges. So the principles on this slide specifically address the protection of shareholder value. On this next slide, we measure ourselves against these principles that we articulated. Firstly, the earnings performance has been achieved whilst absorbing a very material endowment impact from the sudden drop in the repo rate. Secondly, we encouraged business to focusing -- to focus on managing customers' existing debt load rather than chase new business. This stance taken by the business played really well into the macroeconomic themes of a buildup in consumer and business savings and a sharp decline in private sector credit extension, which I will cover later. As the visibility in the recovery in South Africa improves and confidence lifts, the group is in a very strong position, both from a portfolio perspective, capital perspective as well as credit capacity perspective to play strongly into this recovery. Finally, our portfolios are very well covered with provisions built further in this period, notwithstanding a slight decline in our lending books. The next 3 slides highlight some very important macroeconomic trends. So beginning with South Africa, top left sets out South Africa's real GDP. And the sharp rebound is very evident as the economy adjusts to life with COVID-19. Full recovery to prepandemic levels may only happen in the outer years. The house price index has seen some support from the low level of interest rates. But again, this was only at certain price points, and we do anticipate weakness for the remainder of 2021, with muted recovery thereafter. The policy rates, of course, remain very supportive for the expected short-term improvement in the economy. Against the backdrop of global monetary policy and domestic inflation being well anchored, we only see scope, at best, for one further rate cut of 25 basis points in the latter half of 2021. Bottom right is the depressing graph of the loss of jobs in the economy, the recovery of which is likely to be slow and delayed. We have recently had a positive SONA and budget from national treasury that clearly sets out a very strong intent for both fiscal and structural reform. As set out on Page 13 of the budget review, we await progress on implementation. And we are going to particularly take note of the progress made around the generation of electricity, the rollout of infrastructure and the creation of an enabling business environment. On Slide 8, one can see the very sharp drop in the growth rate of household disposable income and the equally sharp pullback in the growth rate of credit extension to the private sector. It's important to bear this in mind because later, we will talk about balance sheet growth, and we are very pleased that we did not chase balance sheet growth into these macroeconomic trends. On the right-hand side, one can see that households materially built savings after many years of dissaving, and this is evident in the growth in the banking sector deposit balances. On the other hand, government's level of dissaving materially increased with the recent budget deficit printing at 14%. On Slide 9, we capture some of the important macro insights impacting our U.K. businesses. The U.K. GDP had a very marked contraction with an equally sharp rebound. Again, GDP recovery to prepandemic levels in the U.K. is likely to be a multiyear journey, although we do expect a shorter recovery period relative to South Africa, given the significant government support measures that seem set to continue for a while longer in order to rebuild the U.K. economy. Of course, on top of that, the rapid vaccination program happening in the U.K. is going to provide further support for that recovery. U.K. house prices benefited from stamp duty relief measures, and we understand from the Chancellor's budget that was announced yesterday, those stamp duty measures are going to remain in place, although they do begin to taper later in the year. And from April 2021, a mortgage guarantee scheme based on the successful Help to Buy schemes has been announced. Absent these treasury support measures, we expect house prices to probably drift a little bit lower. The U.K. policy rates remain ultralow. However, U.K. unemployment has also risen and is expected to rise further still before normalizing lower in the outer years. Slide 10 takes us back to our current performance unpack, and it reveals the material jump in normalized earnings compared to the previous 6 months. Top right-hand side indicates the driver of this earnings rebound has been the roughly 50% lower credit charge in these 6 months compared to the charge taken in the 6 months to June. The credit loss ratio, as we anticipated, has also begun its journey towards normalization, reflecting at 1.6% annualized at the December half. On Slide 11, we further unpack the income statement charge for credit impairment. There's been a significant change in the mix of the drivers to the charge with a predicted stage role from performing advances, and that is our stage 1 and stage 2 advances, into nonperforming advances. And this is driving 93% of that income statement charge. This is markedly different to the situation in June, where the economic shock and payment relief had not yet fully manifested in the loan portfolios. Slide 12 moves us on to the group balance sheet, reflecting advances by stage and the progressive buildup of nonperforming loan exposures is evident. Pleasingly, in line with our FRM framework, the performing book coverage against our stage 1 and stage 2 advances has been further strengthened in the past 6 months, notwithstanding that total advances declined by ZAR 35 billion since June 2020. This next slide sets out the provision stack by stage. And you can see here, coverage levels have grown across all 3 stages in the past 6 months, strong motivation for our statement that our balance sheet has been prudently strengthened in this reporting period. Slide 14 sets out the walk of the group core equity Tier 1 ratio for the 12 months from December 2019 to December 2020. The ratio has been maintained at 12%. However, there's been significant movement within this period. Firstly, from an earnings perspective, the second half and the first half of June 2020 and the 30 June 2021 years, respectively, added 140 basis points to our NAV and the interim dividend of the 30 June 2020 year absorbed 80 basis points, resulting in a net NAV accretion. Even though the balance sheet grew over this period, only ZAR 17 billion risk-weighted assets absorbed 80 basis points of core equity Tier 1, largely as a result of risk migration and rand depreciation. Risk-weighted asset density at the half year ended lower, given the increased holdings of government securities and treasury bills. Pleasingly, we were able to grow our core equity Tier 1 ratio in the past 6 months from 11.5% at 30 June 2020 to the 12.4% that you see here on the slide. And then just to note, FirstRand Bank core equity Tier 1 ratio was at 13.5% for December 2020. On Slide 15, we set out our economic view of capital. In other words, this is the unencumbered economic surplus above the required minimum level of regulatory capital. We add a management buffer of 2.5% to the end-state regulatory minimum of 8.5% and then we express a target range for management of 11% to 12%. So the economic surplus above 11%, which would be the floor of that management range, amounts to ZAR 14.8 billion, giving the group ample capital over a 3-year period for known regulatory changes and, of course, to support growth in the economy. And one of the adjustments we make around this economic surplus is, of course, our use of Directive 3 of 2020, credit capital relief on restructured exposures. The robust CET1 position informed the Board's position -- decision to declare the interim dividend. Whilst the Prudential Authority granted welcome pandemic relief to the banking sector last year in terms of both capital and liquidity relief, the Board did not change any of the long-term targets as a result of these relief measures. All right. Getting now to some of the operating reviews in a little more detail. So here on this slide, we unpack the year-on-year group normalized earnings of ZAR 11 billion by operating business. And understandably, all reflect a decline compared to the prepandemic base. I am going to unpack the customer franchises in detail. The center period-on-period movement is analyzed in the appendix to the slide deck. Right. So more insightfully here on Slide 18, we can see the preprovision operating performance by business on a rolling 6-month basis. PPOP, as we like to refer to it, reflects the operating results before considering the income statement impacts related to credit. And very pleasingly, apart from RMB due to very specific base effects, I'll cover it later, all of the franchises reflect growth in PPOP since 30 June 2020 with FNB growing at a commendable 14%. Right. Just drilling down into FNB a bit more. Some of the key takeouts here are set out on Slide 19 that drove that 14% increase. So despite the challenging environment, existing customers continue to upgrade, resulting in ongoing migration from consumer banking into premium banking, and FNB continues to see growth in new customers, attracted by its market-leading offerings. FNB's highly rated digital on-platform propositions saw transactional volume scale over the past 6 months as economic activity returned. The platform capabilities also enabled liability gathering for FNB. In line with the group FRM guidance, FNB focused very sharply on customers' in-life portfolios and careful front-book origination. The business has, as a result, built healthy capacity for new origination, as the economy improves and customers increase their credit appetite. Here, we have an operational dashboard, and I will call out certain key points. So if we begin top left there with customers, very pleasingly, main-banked customers, up 3%. I think a big shoutout here for FNB commercial grew their customer base 9% over this period. Looking at the insurance business, in-force annual premium equivalent up 9%, again, very impressive. And this business now has got a 25% penetration into the retail main-banked base. Very impressive that now we're the third largest insurer on that score. When we started with FNB Life, I think we were seventh, so this is how quickly we have scaled up into third place, and we are going to continue to make progress there. eBucks, you can see in the middle of the slide, down 19% in terms of earn value. That's really a function of volumes, particularly driven by lower card spend on credit and debit cards and of course, then fuel spend, all big drivers. So generosity certainly wasn't dialed back, but it's a volume issue. Very pleasingly, we've paid out since inception, ZAR 14.2 billion in eBucks rewards. Wealth and investment further down there, you can see account base grown 18%. Again, plays very strongly into the behaviors that you've seen playing out in South Africa, deposit balances growing, big focus by consumers on saving and invest, and this plays very well into our strategic themes around money management. So we're very pleased with the performance here. Just top right, this is the first time we've hit the sort of milestone. 71% of FNB's customers are now digitally active. You can see how those volumes are strong. I mean I could call out app, in particular, it's now the chosen interface of choice. Volumes up 22%, monthly logins, growing very strongly. So this is very impressive. And you can see it all translate into that FNB brand really receiving some impressive accolades, one of which is captured here on this slide. Slide 21 depicts the growth in digital platforms. So for us, just to remind everybody, that would include mobile banking, it would include online banking and then, of course, the banking app. And if you look at that over a 3-year period, you can see monthly logins now reaching 130 million per month. The convenience and functionality of the app has seen logins grow 2.7x over this period, even driving some activity from online to the app. And then mobile interactions are likely to further migrate to their banking app as smartphone penetration continues to grow. Some of the key aspects of the digital interactions for both customers and FNB are set out on the left-hand side of the slide. In summary, for customers, the offerings are contextually shaped. They are helpful and conveniently presented in a trusted environment, and we see how that resonates well with those customers. From an FNB perspective, the digital platform has and will continue to support growth in customer numbers, growth in and diversification of revenues and then, of course, importantly, efficiencies in origination and fulfillment. Impressively now, 6 million FNB customers are now -- are digitally active. Just having a look at some of the transactional volumes on this next slide and the recovery. You can see the drop-off in 2021, the first month, and although January is typically a seasonally weaker month for the group, it is pronounced, given the impact of the late December adjusted level 3 lockdowns. High-frequency data that we have at our disposal already suggests that this trend line has once again turned positive. Regarding origination in the FNB business set out on Slide 23, FNB adopted a cautious approach over the last 6 months. Whilst payrolls have largely recovered overall, the lower end of the consumer segment as well as the upper end of wealth are yet to fully recover payrolls. Some customers targeting particular property price points took advantage of the low interest rates to secure a mortgage, although disbursements are certainly -- have some way to go to match previous run rates. Personal loan disbursements are recovering far more slowly. This is a function of reduced demand as well as tighter FNB scorecards, and you can see this reflected in the risk distribution of new origination. Collections performance within FNB has fully recovered to prepandemic levels. Moving to deposits. You can see FNB deposits grew strongly, both in the consumer and business segment, and this accelerated growth is evident interestingly from March 2020, clearly a behavioral response from customers due to the shock of COVID-19. Again, for FNB, savings propositions on-platform made fulfillment very convenient for customers. Moving to FNB Life on Slide 25. Very pleasingly, we can see that the new business value increased in the past 6 months driven by strong funeral cover sales. Credit life sales were lower given the decline in the unsecured lending portfolios. FNB Life's claims experience, in particular for mortality, increased markedly over the past 6 months. Once again, the power of the FNB platform assisted customers, both with the logging of claims and with the fulfillment of those claims. Delivering the annualized return on embedded value of 17.7% after the setting aside of significant provisions we think is a very impressive result for FNB Life. And as you can see there, the value of new business written over the past 6 months is up strongly. On this next slide, we see the performance of the 8 FNB subsidiary banks in sub-Saharan Africa. We think a very commendable performance from the 3 mature subsidiaries compared to a prepandemic base. The mature operations, of course, all experienced very similar themes to what has played out in South Africa. The more youthful businesses sitting in the portfolio found the environment much more difficult. And in particular, I think if we look at Mozambique and Zambia, they both have to navigate a very difficult macroeconomic environment on top of the challenges of COVID-19. Additional overlays for the growth businesses primarily drove the decline in the result for that cohort. Moving on to RMB's performance for the past 6 months. Just to remind you, PPOP, down 18%. The 6-month decline in PPOP needs to be seen in light of the base effects of a private-equity realization that RMB had in the second half of 2020 plus a very strong markets performance at that time and, of course, lower year-end remuneration. So how do these results look if one takes that into account? The markets business had another very good performance, particularly in the domestic rates business as well as their commodities activities. The banking business, on the other hand, saw a rebound in volume-driven transactional revenues. And again, this was boosted by growth in the rest of Africa. RMB overall advances declined, reflective of cash-flush corporates with available productive capacity and hence, no need to invest, resulting in overall subdued credit demand. So new business origination, which was reasonable, was insufficient to cover the net repayments on the book. Portfolios remain very well provided with a very keen focus on certain sectors that remain challenged, such as tourism, leisure, aviation and then selected real estate. The trends on Slide 28 support some of those key takeouts. You can see far lower facility utilization, and the flip side, of course, growing deposit balances. The card-acquiring trends, again, point to that gradual recovery. And again, you can see the January 2021 seasonal impact. But again, this is headed in the right direction as we speak. Looking at RMB's activities, in the rest of Africa, the banking business was the outperformer, growing the client base and benefiting from the improvement in the oil and gas sector, enabling the business to walk back some of the provisions that they had raised. And then the markets business saw a slowdown in the Nigeria-London volumes corridor, and that's really around servicing international investors. Moving then on to WesBank's performance for the past 6 months. Just to remind you, PPOP, up 5%. Some of the key takeouts: New vehicle sales in units dropped 29% in 2020, taking the sector back to levels last seen in 2009, so a decade of growth effectively taken away. We do predict growth for this next year, although it's certainly going to take some time to get back to levels that we are. And so we are anticipating a structurally lower new vehicle market, certainly for the medium term. In line with FRM discipline, the business continues to focus on quality origination, notwithstanding increased competition, chasing fewer financing opportunities in the market. And this has come at the expense of some retail market share for WesBank. Strategic imperatives continued with improvements in securing the VAF opportunity for FNB main-banked customers when it comes to new origination. And now 50% of that retail book with respect to VAF is main-banked. So it's great progress, and this also aligns with the FNB strategy of fully building out the customer ecosystem with respect to vehicle. Repossessions for WesBank remain a challenge due to backlogs in court processes, and this results in sticky nonperforming loans. At the same time, there's a good recovery sitting in the NPL book with a growing cohort of paying customers. The cost containment and capital optimization that we have come to expect from WesBank has continued. Slide 31 sets up some production, risk and collection trends. And you can see the pent-up demand driving volumes from May 2020 has now stabilized with a further dip in January 2021 due to lockdowns. Origination quality has been maintained, and this is in the face of declining application quality. Recent collection performance in WesBank is also looking much improved. Moving on now to consider our businesses in the U.K. On Slide 32, we set out some of the key performance metrics. So just to remind everybody, the Aldermore Group focuses on the provision of finance to U.K. SMEs, homeowners, landlords and vehicle owners as well as providing competitive savings products. Customer numbers now for Aldermore exceed 580,000. Notwithstanding an unprecedented economic period in the U.K., PPOP came in at GBP 126 million and that's up 3% on a rolling 6-month basis, with ROE improving strongly from June 2020. Payment relief has been provided by Aldermore to almost 56,000 customers, and pleasingly, the vast majority of these customers have now resumed full repayment. Net lending to customers, inclusive of the MotoNovo back book, came in at GBP 14 billion, up 1% from June 2020. In line with group FRM themes, Aldermore also focused on in-life portfolios and working with existing customers rather than chasing new origination. Customer deposits for Aldermore grew to GBP 11.5 billion, up GBP 600 million from June 2020. Just looking at some of the key takeouts for the 6 months performance, net interest margin increased slightly from 3.2% at June 2020 to 3.3%. Despite continued investment in digitization and automation, the cost-to-income ratio improved slightly to 46.7%. The origination pipelines for Aldermore remain healthy, and credit capacity has been built to support customers for the economic recovery. Good progress is also being made on embedding the FRM principles deeply into Aldermore. Just looking at some of the business lines for our U.K. business. You can see retail mortgages grew GBP 100 million to come in at GBP 7.4 billion, and this is really due to lower customer activity. Business finance, on the other hand, contracted slightly to end at GBP 3.2 billion as COVID-19 continues to impact certain of those sectors. MotoNovo Finance grew their book to GBP 3.8 billion, inclusive of the back book, reflecting ongoing growth and pent-up demand in the months following the first U.K. lockdown. Slide 35 sets out nonperforming loans and arrears trends in the advances book. And you can see the growth in nonperforming loans reflects the volatile economic outlook. The ongoing impact of government relief schemes and forbearance by Aldermore and the seasoning of the increased loan book. Cost of risk, inclusive of the back book, printed at 81 basis points, down from 124 basis points at June 2020. The expected roll into nonperforming loans is evident from the trend line for nonperforming loans as well as arrears. And now I'll hand over to Harry Kellan for the financial review.

Okay. All protocols observed, I guess. Good morning, everybody, and thank you for your time. Okay. So what we're dealing with here is 2 very distinct reporting periods. One, pre-COVID, and clearly, the other one post-COVID, and that's what you see a material reduction of 21% in our earnings to ZAR 11 billion. Having said that, that's well within our guidance range that we issued last year in November. As Alan has covered, we've resumed our dividend payments, so a dividend at ZAR 1.10. That's 24.7% down. And the payout ratio is at 56%. Given better-than-expected rebound, and as Alan said, the smidgen of positive mark with cost of equity actually increasing 100 basis points to 14%. Group maintained a healthy capital position, and we accreted capital NAV per share up 8%, and I'll cover the remaining parts of this as we go through the presentation. Okay. So preprovision operating profit, clearly, impairment is still a significant theme this period. So profits are marginally down on a preprovision basis. Now this is actually quite pleasing when you consider the endowment impact of 300 basis points in the 6 months, across capital and more so across our endowment deposit base. Looking at the graph on the top left, you will actually notice that total revenue is flat period-on-period but 7% up since December. And that is, again, despite the endowment impact. And this does actually include some mitigation benefit from group treasury on some of the ALM strategies and that was actually passed on to the business on the deposit margin, as you'll analyze later, and then as well as on the capital side. So overall, this helped maintaining NII. NII is down 1%, clearly, a consequence of COVID. However, the rebound since the sales of the first lockdown in March last year, you can see against a 6-months rolling to June. So moving -- so that's revenue. Moving on to cost, 1% up, clearly benefiting from a pre-COVID base, especially when you consider variable remuneration. Impairment charge, we'll cover in a lot of detail as I'll go over it later, but on the bottom left, you will have seen an overall increase of 59% against December last year with the substantial cutback that you've seen on the impairment charge against June. Okay. So then moving on to the income statement. Clearly, you see the big bar of credit. So that's the biggest contributors on the decline. Rest of it, I will actually cover as we go. But on the tax and other, I mean, saying the obvious, lower earnings means lower tax but our tax rate was higher period-on-period. Okay. So net interest income. Balance sheet advances are actually marginally down when you exclude the repo book sitting within RMB. Overall NII is up 2%, and that's clearly supported with some repricing and margin uplift, lending, commercial and corporate and also lower cost of funding sitting on interest and expense, even though it's a bigger NPL book. Transactional NII, largely down as a consequence of endowment, and the decline of 1% is actually pleasing, and that's also including, as I said earlier on, the mitigating ALM strategies around some of the endowment impact, especially on the FNB deposit book. Clearly, there's a big underpin here from customer growth that Alan's covered early on as well as a substantial deposit growth. Overall deposits on that note, is up, including transactional. Deposit growth, up a solid 17% in South Africa, and that growth does come at a cost though, cost across product mix as well as the cost against a competitive pricing environment. So you see that in our deposit margins eroding slightly. Rest of Africa has an endowment impact, and advances declined, despite the fact that we've included Ghana Home Loans for the very first time for the full 6 months to December. U.K. operations, that's Aldermore and MotoNovo. NII is flat. In pound terms, it's incorporating a marginal, marginal uplift and some advances given the growth in MotoNovo. Okay. So this one I'll go a little bit slower. Margins, this picture is very different to what we portrayed previously. We have actually changed our methodology in determining the margin movement. This is largely in aligning with market norms and practice. So what we do first is we take last year's margin or last year's income, rebase it to the increased 6% total average assets. So that results in the first piece of 28 basis points reduction in margin. Then moving on to lending margin, net 3 basis points benefit. That's asset repricing, and as I said, despite a higher NPL, which clearly hurt us on interest expense. Overall deposit margins down 1 basis point and again, I have to make the statement, an exceptional performance given the significant endowment impact. And yes, it does include the mitigation strategy sitting within the deposit book. And in fact, a lower net proportionate wholesale funding cost, and you'll see that when I cover the deposit slides a bit later. Treasury margin is largely incorporating the net impact of capital endowment. And so as a result, you see total margins decreasing to 469 basis points. Now when you incorporate the lower-yielding fixed or rather secured U.K. asset book, the margins end at 427 basis points for this period. Okay. So before I start looking at advances and deposits, this is Slide 22, which will give you some insight in terms of the impact of the lockdown. Top left, corporates. Corporates clearly drew down in the general banking facilities as a consequence of lockdown and you'll have seen that when we reported in June. But what you see is a substantial repayment back. So the level is actually very similar to utilization on the pre-COVID level -- basis. Deposits were up at lockdown and has actually continued as what you've seen earlier in terms of corporates clearly maintaining a much higher level of liquidity just given the uncertainties in the macro environment. Moving on to retail on the right-hand side, that's retail and commercial. Deposit growth over the last 3 years, you can see, indexed to January, very similar growth trends when you index it across the period. But what you can see -- clearly see is the dislocation positively for deposit growth at March and lockdown and that actually then give you a step-up that continues across to December. Bottom left is actually our credit card advances. Again, the trend is indexed to January. 2018 and 2019, very similar until you see some of the credit pullback in appetite towards the latter of 2019. What you do see is a significant drop in lockdown. That significant drop then stabilizes as the economy reopens, but clearly still at a lower level. Bottom right is overdrafts for FNB balances and you can -- similar trend. You can see at March, lower spend and clearly also deposits, savings coming into play. It stabilizes again as the economy reopens, but again, at a lower level. Okay. So then moving on to overall deposits. Clearly, the group has had its long-term strategy in terms of gathering deposits and customer acquisition. And the back of that is a strong growth in transactional franchise. That sees the benefit across in terms of deposit growth. And as I stated, since lockdown, even further benefit. Now that is supported clearly by the customers leveraging the strong digital channels and maintaining -- while FNB has continued to maintain, as I said earlier, on a very competitive pricing and product mix into the market. Now customer savings, you could probably put into 2 buckets: one, a full savings, which is the inability to sort of spend during lockdown; and then since then, you move on to effectively rainy-day savings, again, also given uncertainties. So you see strong performance across both franchises, FNB and RMB. Then including Africa and Aldermore, deposit franchise growth is overall 18% up. Now the excess liquidity was partly used to acquire some additional assets in the form of government bonds and T-Bills. However, the group has also used the opportunity to have lower issuances into the institutional market. We're trending down 13% but still significantly at a over ZAR 300 billion level. Now with the lower issuances, in particular, when you see it in the green bar in terms of 12-month entities, well, the benefit of that low issuance is clearly a far more increased weighted average term to 42 months with, on the left, composition declining to about 28% on institutional funding, and the lowest probably in more than a decade. Okay. So then moving on to advances. For now, I'm just going to stick to group advances. At the back of the booklet in the appendix is all the product advances splits that you've seen in June. So when you move on to -- at a group level, we start off with this and then the wheel, effectively, you'll see is that 50% is still being maintained for retail and a pretty diversified book. Then moving on to this, is overall advances are marginally up, as I said, including the repos. It's up at 1%, but 3% down since June. Stage 1, 3% down. Clearly, stage 2 since June, also down at 4% with a roll into NPLs, up 7%. And I have to state that when you look at 7% NPL growth since June, given this environment, it is much better than expected. Okay. So when you move on to -- this show -- this effectively shows you the provision stock, and Alan had covered briefly, but in terms of numerical values, you've seen a substantial uptick of about ZAR 14 billion in provision stock to June, that's the incorporation of forward-looking information that we've covered in detail previously. Since then, you see a net much lower ZAR 4 billion increase in total provisions to just over ZAR 53 billion in provision stock to December. Moving on to coverages. Stage 1 coverage has actually increased marginally from 100 basis points to 110 basis points. Similarly, you see a coverage increase sitting in stage 2 to 11.7%. Now when we look at forward-looking macro view, yes, given the better-than-expected rebound, the forward view has actually marginally eased off since June, especially when you consider the vaccine rollout. But when you -- what the business has looked at is saying that we've actually maintained a conservative coverage level, and I'll cover that a little bit later, largely given, a, the lag impact. And you can see that volume lag impact as a consequence of a lockdown on wave 2. And similarly, you see conservative building up in terms of coverage for NPLs. Now all of this results in effectively an increase from 95 basis points to 146 basis points increase in the charge. And then since June, you can see the substantial decline. Okay. So I know there'll be a lot of questions around COVID relief book and the consequence of it all. So overall, only 16% of the group's advances actually made availability of relief. And when you consider that a majority of that, 75%, actually did not require any form of extended relief. What we have given you is a segment breakdown in terms of staging of the COVID book. Now on an overall basis, only 6% is actually staged as 3 or rather NPLs. Now that performance, as I said, overall, is much better than we had expected, given the strain that we think -- we have thought since June. Clearly, the portfolio splits are different. And what you would expect is clearly more strain sitting within a retail component part of the book. NPLs, so instead of just moving from December to December, which was actually up more than 36%, and as I said, only 7% since June, but what you see in June was a clear big buildup in terms of operational NPL, just over ZAR 8.8 billion on year, ZAR 8.8 billion, ZAR 3.5 billion of relief-related NPL buildup. When you move these since June, you actually see, pleasingly, operational NPLs actually declining, and that's testament to a, collection efforts; and b, clear cash within the system and the rebound. And then technical cures are up, and those are paying NPLs, so that's actually also pleasing. And a further deterioration in the COVID NPLs as you see buildup of ZAR 2.6 billion. This is just taking another take at NPLs, so I won't spend a lot of time to this. This is a growth in each of the product sets. Clearly, you see growth right across every product piece. Africa, one, actually, is pleasing 4%, but there's just some specific counters in unwind. Period-on-period, as I said, is up 36%, 7% since June in overall NPLs. Impact on this slide, so I'm on Slide 50. We covered an absolute 59% increase in credit charge. The ZAR 9.4 billion, you see this across on credit loss ratios on each product. And what you'd expect is that no product was spared in terms of increases since December '19. And similarly, you see that all reduced since June 2020 on the 6 months basis is also clear. Overall NPL coverage on the red dotted line above the bars. Clearly, you see the conservative provisioning being put into place with coverage at 45.7%, but also remind you that there is a mix change weighted towards higher provided unsecured. Okay. So this slide, I try and unpick this ZAR 9.4 billion of impairment charge. So let's just start off to orientate on the bottom piece on the gray side. Overall stage 1 advances declining 3% since June. When you consider that the coverage effectively is up from 100 to 110 basis points, this resulted in a marginal increase of ZAR 328 million. Now if you step back, clearly, with a declining expectation around -- or declining advances book, where the marginal change in terms of more positive on that life book, you could have clearly expected a decline in the provisions. Those just shows you effectively some of the post-model adjustments implemented by the business, and that's just given the substantial uncertainty sitting in the impact of wave 2 lockdown and the macro view going -- or the macro uncertainties sitting into June. Similarly, you see the same trend in terms of stage 2, advances down 4%; coverage up 11.7%. So you have a net charge of just over ZAR 330 million across, and then you can see that conservatism bolt in. What you will see in the analysis in the book is that we've highlighted specifically on the FNB, a ZAR 621 million thematic overlay sitting in stage 1, and that thematic overlay's across the portfolios on retail and commercial, and that is largely to cover some of the strain we expect post-December, given wave 2 lockdowns. Then stage 3. So what you see effectively is write-offs. So write-offs are up 11% period-on-period. Now that is expected, given when you actually look at the roll and the increase in the NPL book. Similarly, what you would expect is not unexpected if you have a marginal decline and post lighter recoveries from ZAR 1.3 billion to ZAR 1.1 billion, and then effectively, the buildup of ZAR 3.3 billion in stage 3 provisions given, in essence, the rolling to higher NPL balance sheet. Okay. So that's credit. Moving on to effectively NIR, so I'm on Slide 53. So on a pre -- considering the impact of COVID, marginal declines -- in fact, what you would see is NIR is fairly resilient. And why do I say that? One, last year, July, FNB effectively had a headline price increase of 0%, so effectively flat on prices; two is some of the insurance income, and you'll see that later, we effectively had higher claims and higher claims provisioning. And just to mention the positive as well although marginal, but actually, we had small realizations in private equity as well as just a ZAR 260 million, a realization in some of our principal investment book as well. So hence, the overall resilient comment around NIR. When you unpick some of the component pieces, again, you see this on a rolling 6 months, you will see them. Top left is a fee and commission income. It certainly benefited from the rebound that we're talking about since lockdowns, flat period-on-period, but actually up 15% from the lows of the lockdown to June. Global markets, its trading income, effectively, for the 6 months, they had actually a stellar performance and excellent revenue growth in 6 months to June. You see that uptick within the rolling 6 months, although the momentum has reduced to December, down 15% since June but actually still at very healthy levels and up against last year. Investment income, you can see the impact of nonprivate equity investment write-downs to June, but that didn't reoccur this period. And period-on-period, in fact, you can actually see marginal growth from ZAR 703 million to ZAR 710 million in terms of revenue piece. Insurance income, now yes, it was impacted by higher claims, but the nature of the claims actually change period-on-period. What you had to June was effectively more on retrenchments and retrenchments claims provisioning. And since June, it moved on to mortality. So that's the theme to effectively December. This impacted equally both the cell captives as well as our own licensed products. So overall, it results in an 8% decline in insurance revenue. Then we have previously always flagged in terms of exiting a realization cycle, and you can see that in terms of lower realization since the peaks of prior. Similar to June, we provide the impairment impact on private equity. In this period, we've actually taken on further impairment on specific counterparties. And just to remind you, these are effectively loans, although setting part of advances book, we actually view them as far more risky given they're effectively shareholder loans. We did have a small private equity realization. But what is actually fairly resilient as well is the continuation of strong annuity income base. Unrealized value maintained slightly up to ZAR 3.9 billion. And what you see in the yellow bar on top is very little effective new investments. And clearly, that's given where we see this environment and the uncertainty around the place. Okay. OpEx. Overall OpEx, December '20 and December '19, up 1%. That's, again, benefiting against a pre-COVID December '19 cost base, which did include some remuneration recalibration that actually only happened when we get to results of June '20. So one of the things we've always stated is that the group continues to invest in technology and its platform and it's expensed to the P&L, resulting in overall IT costs up 9%. So that's on the wheel on the bottom, with computer expenses clearly what you see driving up at 22%. The investments in the FML business that we've spoken about previously, you can see that impact with depreciation up at 5%. COVID clearly did have some benefits in terms of some of the cost: Travel, utilities and et cetera, and that results in other expenses down 3%. Picking up on to the biggest part of the group's cost base, staff cost represents 60%. Union increase was effectively 4% last year for nonmanagerial staff. We've had 3% for, effectively, managerial. And senior managers had a 0% increase. So we see some of that benefit in terms of the cost growth for the 5 months from August. And then together with headcount reduction, we do have an overall staff cost increase by 4%. And then I've got to remind you again, that includes Ghana for Home Loans for the first time in the 6 months. Variable rem reduction actually is what supports overall staff expenditure, up 1%. As I said, that was recalibrated lower when you once went into performance into June last year. So what you would expect is remuneration to effectively normalize by the time you get to June '20. Okay. So what we provided here is effectively some of our cost trajectory over the last 5 years. So overall operating expenses, and I got to remind you, this is excluding Aldermore because Aldermore effectively was acquired in the midpoint of this 5-year trajectory. Overall cost compounded growth rate was 6%. IT cost, which is at the bottom right, that compounded growth is closer to 9%, 8.9% to be accurate. Now this demonstrated the statement I made earlier on in terms of continued investment in our platform and IT technology stack. When you exclude that, effectively, that 6% compound rate is actually 5.3%, that's the top right. So that's a 0.7% impact compounded over the 5 years. Staff expenditure grew at a compound rate of 6.5%. Now clearly, that includes a combination of a part of inflation increases as well as headcount growth. So if you step back, if you look at say, overall cost, up 6%, with IT up 9%, staff at 6.5%, you clearly see, and it demonstrates some of the efficiencies that we talked about in terms of getting the overall cost compounded down to 6%. Ladies and gentlemen, I'm on my last slide. So this is Slide 60. This shows you effectively the cost-to-income ratio. We've spoken previously about our structurally sticky cost despite we're making efficiency progress as I mentioned earlier on, and you see the impact of the revenue rebate or a variable rem rebates sitting in there. So that's 1%, but with revenue being flat, we actually see some deterioration in cost-to-income ratio to 52.8%. On that note, I'd like to thank you for your time again, and I'll hand you back to Alan.

Right. Right. We're wrapping up. All right. Looking ahead, right. Right, so looking ahead to our 30 June 2021 year-end, we do expect a continued recovery in the South African economy as sectors continue to gradually open up. However, as we explained a little bit earlier, certain sectors are expected to remain challenged for much of 2021. And as Harry also covered, the full effects of the adjusted level 3 lockdowns are probably yet to be fully felt. There's, in South Africa, of course, the possibility of a third wave as we head into winter. And I guess that would come with associated many lockdowns. And there's also likely to be an extended time frame associated with reaching the target level of vaccinations. And I think these 2 factors really cause us to be cautious on our outlook. As an update to previous guidance that we gave at the year-end, we do now expect our full year earnings to June 2021 to exceed those of the previous financial year. However, to the points -- owing to the points just covered, we are guiding that we think the level of earnings for the first half are not likely to be fully repeated in the second half to June 2021. Just as a backdrop, looking at the macroeconomic outlooks for our 2 most important markets, you can see here on the slide, the South African economy, we only expect to fully recover its lost ground and return to previous peak levels by 2024/'25. And you can see that on the right-hand side of the graph, it's really the difference, the delta between where you see that trend line and of course, then the dotted green line around where the peak level is, the delta between those 2 lines. With -- this, of course, contrasts with the U.K. economy that despite having a very severe contraction is likely to regain that lost ground faster, given the extent of the fiscal and mandatory support in that market. And again, you can see that the delta between those 2 red lines is a lot smaller. Right. This takes me then to my last slide. And I have to say with the presentation of these results, we do believe that the FirstRand investment proposition remains intact. The speed of this rebound and the quality of the rebound, we believe, is reflective of the underlying quality of our portfolio of businesses. The strategic focus, and now for many years, on digital platforms, driving customer adoption and the building out of competitive customer propositions has proven itself to be immensely beneficial, in particular, in this last year. Our articulation of and delivery into the FRM themes continues to guide the group through the rebound towards sustainable growth. Our recovery in economic profits, much-improved returns and, of course, pleasingly, distributions to our shareholders is very pleasing for us. Just some thank yous to wrap up. Firstly to our various regulators, in particular, the Prudential Authority, for their guidance and assistance to our sector. It's been well-considered and always professional. Thank you to our customers. We always say this, but without you, we don't actually have any business. And then finally, thank you to our many employees. This past year has taken its toll on you and your families. And regardless, you have stepped up and you have delivered for FirstRand. Thank you all for your attendance, and now we will open to questions. I do have the full team here. So we'll be -- we're very pleased to take any questions there may be.

So we start, firstly, in the room, if there are any questions. We go to the webcast. But how do I get to see those questions?

I'll read them. I'll read them out.

You'll read them to me? I'll...

Okay. Our first question -- can you hear me? Can you hear me now?

Yes, yes.

First question from Chris Steward, Ninety One. Any concerns that you'll reduce credit appetite no matter how logical under the circumstances may cause peer-relative transactional banking franchise damage?

Yes. Just to answer Chris' question there. I mean I have to say the relative pullback in advances growth compared to the competition didn't catch us by surprise. Of course, we monitor all the BA regulatory numbers so we could see where the rest of the banking market is. I have to say, pushing credit, in particular, into the economy when there's a macro theme of a significant pullback in the growth -- in fact, it turned negative, as I showed on that slide, customer disposable income, and a significant buildup of savings balances. You can see customers' behaviors are really to kind of be much more cautious on the outlook. So we didn't feel that was the macroeconomic environment to be pushing credit. The second point is we were very mindful, I think, around looking after capital balances as well. We always had our eye on getting back to the resumption of dividends as quickly as possible. And that meant that our CET1 balances needed to accrete over this period. I think if we had loaded the stack with significant stage 1 origination strain, we may not have been in the position that we're in. So we're very comfortable that our franchises are very healthy. We've got great strategies. We know that we can activate new origination very, very quickly. But at least now we've built both capital capacity as well as credit appetite capacity. Thanks.

Another question from Chris. Please unpack your statement that second half earnings will be lower than first half earnings. What will be the drivers? What would change your view regarding this guidance?

Yes. I'll go -- so one of the factors therefore, for Chris, that I didn't mention is, of course, in the second half, when we run up to June -- if we look at the previous year-end, of course, we had a big benefit from a cost perspective around remuneration. So that may well normalize at 30 June 2021. So we won't have that benefit from a cost perspective. Two, we do think that -- we don't anticipate material further deterioration in credit, but we're certainly not anticipating a big write-back of provisions over the next 4 months. So we would expect to try at least maintain coverage levels. We would rather get to our -- the start of our new financial year where we have better visibility before we start tackling that. And then I do think there is a -- the recovery in South Africa, I just think from a behavioral perspective from customers, from citizens, is going to be delayed. It's not without a significant effort from governments and -- but the vaccination program is going to take longer in this country. We're really at the very beginnings of it, and access to vaccines is not in our control. At the moment, we are dependent on foreign suppliers, so that is going to, I guess, come in batches. And then the distribution is going to take some time. So although government spoke about a target of getting the 2/3 of the population vaccinated by December, even if we had all the vaccination, we have vaccines sitting in fridges today, that would need a rollout of about 140,000 vaccines every single day. Weekends, public holidays, so we don't think that is going to be feasible despite huge efforts so we are expecting this, I think, to drag into probably the middle of 2022. And that is going to change behavior. So we just think that economic recovery is going to take time. It's -- we're definitely on the up and up, but it's -- we're not running into it. It's -- let's just say it's a brisk walk.

Okay. And another question from Chris. Please explain the base effect of minus 28 basis points in NIM.

Okay. Harry?

Perhaps I can take this. I'm just seeing if everyone can hear this mic. I think the easiest would be to -- if you actually look in the booklet on Page 64, and I'll make it -- let's use the term numerator and denominator. We've effectively capped the income as last year. Clearly, the denominator last year was an average interest-earning assets. And on that page, you'll see it's ZAR 1.071 billion, so effectively, that's the first base of what you get the margin last year. And all we do is effectively change the denominator, i.e., increase it to this year's average earning assets, and that's actually ZAR 1.133 billion. And that 6% increase effectively by keeping the numerator being the flat of last year rebases your first -- your margin by 28 basis points. And then you deal with effectively every change in your income thereafter, which what we've seen is effectively where we see the norms in the market coming across in terms of margin analysis. Hopefully, I've answered that.

No more questions from the webcast. I think we -- let's just check if there's questions on audio.

Yes, we do have questions from the audio line. [Operator Instructions] The first question comes from James Starke from SBG Securities.

I've got a couple of questions. The first, regarding NIM, we've seen a lot of pressure come through already. How close are we to sort of steady-state NIM? And if you can perhaps also give us some color on the pricing you're seeing in the marketplace relative to reference rates on your new business where you're writing mortgages relative to prime, some of the corporate stuff related to Java on those concessions? Then a second question, 2 parts really on noninterest revenues. If we look at your insurance numbers, you mentioned higher levels of claims paid and provisions. If you could perhaps give us some color or break that down between how much was actually provisions or increased provisioning versus actual claims paid. And then lastly, with regards to risk-weighted assets, I mean, how should we think of that growth from here, particularly relative to total assets? I mean have we seen the end of ratings migration? How should we think about balance sheet mix shifts in the year ahead? And perhaps any more rotation into higher-quality, lower-yielding assets? So any color there on RWA formation.

Good. Thanks, James, for those questions. I'll deal with the last one, and then I think, Harry, you'll pick up the one on NIM, and Mary, you'll pick up on insurance. Just on risk-weighted assets, sort of that densification, it's probably closer to 50% from a previous sort of steady run rate of 60%. And again, it's -- it talks to those points that you have raised around some migration but I think probably very particularly in this period, the significant increase in government securities and treasury bills. Of course, when you see the kind of liability gathering that we have, of course, a lot of that money is going to end up in HQLA and government bonds and treasury bills. So that buildup has happened. Of course, that has lowered our risk-weighted asset density. We do expect, as that recovery happens, that mix is then going to start reversing. We would imagine much more sort of private sector credit growth, and we -- I think you should expect some sort of steady walk back to probably a 60% density level. Harry, do you want to just pick up on NIMs?

James -- certainly, thank you. So James, in terms of where we expect NIMs to go forward-looking, I think it's fair to say you're still seeing marginal pressure downwards. Now yes, bulk of the 300 basis points in the 6 months of endowment is in the base of the 6 months. H2, last year, we took 65 basis points of the endowment impact into the first half. You see an incremental endowment impact in the second half. But I don't think that's the leading trend. I think the fact that you've seen some benefit on margin repricing, I don't see that continuing for too long, and I'll come to your second part of the question around that. So advances margin, I think the fact that we have a positive 3 basis points now. I think it will turn into the next 6 months, as you can see the trajectory of advances growth. So I think when you go to the moving parts and components, you'll see a reduction, marginal basis points reduction. What we have on Page 61, giving you a restated at June '20 margins stack up. And when you compare that 491 basis points, and I'm excluding Aldermore, to effectively 469, I think it's fair to say the biggest impact of that is endowment. You'll see a, as I said, a marginal endowment impact. But I don't think you should pencil in any -- an overall margin uplift when we get to June. So that's the one piece. I think before Mary answers on insurance, in terms of your question around corporate repricing, et cetera, I mean you know corporate is actually quite finely priced. I'm looking at James to tell me any different. That continues. The fact that effectively, the corporate book has actually declined when you exclude the repo book, that was very much very selective pricing and origination. So you'd see a point in time, some benefit. We don't think that continues into the full year either. So we see some recalibration downwards, just given the fact that effectively what you want to do is service your clients out there. So it's not always just about a pricing game. It's effectively being there when the time is right. So we do see some activity buildup in advances, but again, not substantial. And Mary, if I could give you the insurance claims.

Okay. So insurance claims, James. So for the full year 2020, the claims paid was about ZAR 1 billion. And in these 6 months, it's been ZAR 965 million. And ZAR 800 million of that is mortality and the other one in the ZAR 165 million being credit life. So I guess quite an increase in the number of claims. From a provisions point of view, I'll just maybe say -- first remind you that a lot of the provisions that we took are not on balance sheet because we've got a significant amount of negative rand reserves. So we've got about ZAR 1.8 billion -- so we had about ZAR 1.8 billion that we took to June that was increased to ZAR 2 billion, that's in terms of provisions. And that's largely for mortality provisions. And obviously -- and I think we've had a slight adjustment, but not a big one, to reflect the fact that we've got a more improved outlook for retrenchment claims. So we've reduced the retrenchment provisions just slightly and increased it for provisions for mortality. I hope that deals with that.

Thanks, Mary. Right. Thanks for those questions, James. Any other questions?

Yes, we do. The next question comes from Ilan Stermer from Renaissance Capital.

Just -- I'm still struggling a little bit to understand the extent of your caution because on the one hand, Alan, you'd mentioned, I think it was in response to Chris' question, you're talking about a brisk walk. But there's a lot of caution seemingly injected to all the commentary. The on-the-ground stuff for collections, NPLs, everything else, the data seemingly you're talking to all seems to be fantastically well -- going fantastically well, much better than one had anticipated. So maybe just draw for me an overall conclusion on where that caution is. Is it just sort of the classic FirstRand caution? Or was there something in the data that's giving you pause for thought? First question.