FirstRand Limited (FSR) Earnings Call Transcript & Summary

All right. Good morning all, and welcome to the year-end results presentation for FirstRand Limited. A little different to last year. We're going to spend some time just unpacking some of our strategic initiatives that we've been hard working at and some of the strategic themes. And in many respects, the results that we'll talk about a little bit later are reflective of these strategies and the resources that we have, accordingly allocated. Right, you have probably seen this slide before, it's our one slide summarizing our group strategy. And right at the top, our purpose frames our aspirations for delivery to our stakeholder groups, and I will share more of this on the next slide. Our unique business strategies, we believe, create distinction, and I will cover the regional views and highlight as well the value of our digital platforms. The long-standing disciplines that we have in the management of our financial resources, we always speak about those. And then our particular people philosophies, we believe, continue to underpin the FirstRand story. Right. Our purpose is really set out here on this slide, and it's anchored to shared prosperity. That's intentionally aiming to deliver a blend of both financial and social outcomes to our broad stakeholder groups. And there, we are talking about our shareholders and debt providers, our customers, our employees and, of course, society at large. On this slide, we share some insights on how our business is delivering into this aspiration for shared prosperity. As a systemic financial services player, our balance sheet alone has the heft to drive profound social impact. If I begin with the single most important role for a bank, protecting deposits. We are the trusted home for ZAR 1.5 trillion of country's savings. It's a fact also that home ownership is a major enabler of intergenerational wealth creation. Proven outcomes of asset ownership are higher levels of education and financial wellbeing. At nearly ZAR 290 billion, residential mortgages comprise roughly 23% of the group's total advances. So we are definitely putting our money behind this asset class. We are particularly focused on growing our affordable housing book in South Africa to help low-income customers. SMEs are, of course, key to job creation, and we recognize the role the bank needs to play in supporting their growth ambitions. They are one of the most important engines in our economy for productive capital formation and economic growth. So what is key here is that we are achieving these outcomes whilst ensuring we deliver growth and superior returns to our shareholders. On Slide 4, we focus the strategic lens more sharply on South Africa, the business that generates 80% of group earnings and even more of economic profit. The banking operations are, of course, mature and systemically important in South Africa. However, against the backdrop of weak macroeconomic growth, it becomes clear that, given our size, any aspiration we have to outperform the macros and the competitors requires strategic distinction and sound execution. Our growth imperative, simply put, is to garner more customers, have more business with those customers and do all of that more efficiently. So how is this going for us? Our platform-based business model is well established, and the diversification away from banking activities into the adjacencies of insurance and investment following our integrated model approach is fully on track. We have multiple themes running on optimization, you'll probably hear that again later in today's presentation, and value engineering across topics like costs, our capital, our processes, our physical infrastructure. Sector competition in South Africa is fierce. Hence, customer value propositions need to resonate deeply, enhanced by our proven rewards program. Very pleasingly, in this reporting period, we have seen customer growth across all of our key segments. On Slides 5 and 6, we came to demystify this platform-led business model we talk about. Our desire for digital began 20 years ago when FNB pioneered mobile and online banking and started its e-currency initiatives, which today we talk about eBucks. 10 years ago, FNB was the first retail and commercial bank in South Africa to launch a mobile banking app. Our next shift to what we talk about as being truly digital require reconfiguration of all parts of our organization and the reengineering of our technology and -- technology infrastructure and applications in order to promote agility and scalability. Truly digital, of course, does not mean branchless. Our branches are valuable spaces for interpersonal customer advice and assistance. But importantly, all of those personal interactions in branch are going to be using the same platform tools and processes of our platform. So truly digital entails full ongoing and simultaneous processes. All right, to start. We talk about all of the initiatives to build the platform. I'm not going to go through all of those aspects, but perhaps I can call out 2. The first issue is this focus on growing our own IT talent pool. It was massively important for us to build this capability and not be dependent on consultants or third-party service providers in order to deliver this. So we put enormous effort into growing out that pool. It's something we've done for decades now, and we continue to do it with vigor. And then the other point is, perhaps, our focus around interface integration. So we have a number of digital interfaces customers can use, but it's very important that they are deeply integrated and well orchestrated, and we've put a lot of effort around that and the frameworks that support that. Having built the platform, of course, it's important that we begin to utilize the capabilities that one now has on the platform. Again, here, I can call out, perhaps, data and how we leverage the data capabilities. Two insights, I can talk about our decisioning engine. It's fully up and running, highly productive, and you'll see more of that later in the presentation. And then, of course, our use of data scientists. We've been doing a lot in that space, particularly around the talent hiring, but then also getting these data scientists to work and coming up with business improvement, opportunities or use cases using the data. The other thing that we can call out here is this issue of compliance. It's an ongoing hurdle for banks to not only do all of the compliance and on-boarding of these -- of customer relationships. But that continuous maintenance, annually or sometimes even more frequent than annually is a big burden for banks. The importance here is we put the power of updating customer information in the customers' hands. I'll mention my profile a little bit later, but that tool gives us a massive amount of leverage in trying to get ahead of the compliance story. So you can see just how the regulatory side of it is also solved with the platform. Then we move on to this activity called migrate. And that's really to make sure that all of our workflow and processes, we like to refer to these as work items, all of these take place on platform. So to give you an example of what we're talking about, let's say, a customer would like to order a new credit card. Okay, right now, they could, I guess, write us a letter, they could send us an e-mail, they could walk into a branch, they could call our call center, they could call their banker, they could go on the app. There are lots of different ways for that to happen, not all seamless, not all great experiences. Some of those things are clunky. Ultimately to say, to drive and execute and deliver the same item. So all of that, we are moving that onto platform in a way that is super convenient for customers. It's seamless. It's integrated. And then we can consolidate that workflow. It has massive benefits for us. Now you can imagine how many work items we've got. Many, many, many thousands of work items. And so we have milestones in place, performance frameworks linked to making sure we get through that workload on to platform. And then importantly is this issue of decommissioning the resultant legacies. All of this stuff is taking place, as I say, simultaneously. It's iterative. The other thing we would say here is point out this word evolution. I don't think we've ever going to have landed that platform. We'll continue to enhance it. So it is certainly a process rather than an event. If we -- on this next slide, we give you some -- a sense of what this outside-in customer experience looks like for the engagement on platform. So firstly, I spoke about customers either adopting a small screen or a big screen digital interface. Those are all well orchestrated. That is essentially the entry point into platform for our customers. And then we move into this phase of what we would call registration on platform. So there are many activities there. FirstID, you can see at the top, it's our unique, secure digital passport, if you like, which enables identified, authenticated travel within the ecosystem. And this, together with My Profile, I spoke about that a little earlier, enables a customer to enjoy a digitally productive engagement on platform. It's very important this step happens, and you can see all of the critical issues around security, mandates and consent. And then having done that, customers then enter the world of our ecosystem of integrated financial services. So there we talk about Transact, lend, invest, insure. Of course, that's where there are enormous number of products and services. It's the bulk, I guess, of where our business activities currently lie. And then you can see opportunities to leverage platform. And a good example of that would be FNB Connect, our integrated telco services offering. Hugely important for us. And then you can see there Navigate Life. I will talk a little bit more about Navigate Life later. So we don't have to cover it now. You can see as well we're on-boarding third-party service providers into -- onto platform as well. And this would cover things like prepaid electricity, purchasing of lotto tickets, et cetera. We have a raft of third-party services that customers can access. So whilst we get very excited about launching a new digital proposition for customers on the front end, what we really celebrate internally are the teams that have built the back-end rails that I have spoken about to make this customer experience possible. On Slide 7, of course, you -- it's -- the platform is compelling for customers and many of our customers enjoy it. They rate the platform very highly. And that translates into brand rating. I'll talk about that a little bit later. But importantly, what does this mean for our shareholders and our business? And this slide really sets out these propositions. So firstly, as regards to growing the top line of our business, we know that our digitally active customers have 2 to 4x more products and services and they engage far more than our non-digital customers. And we are also then able to, of course, pursue nonbanking-related revenue streams. So clearly, a top line opportunity there for us. Currently, we are making 30 million digital offers a month. And this is across credit, invest, insure, transact, connect, eBucks. So we'd like to refer to this as our sales channel of the future. And again, this comes back to the output of that decisioning engine. This is why we are able to activate at these kinds of levels. Platform, of course, also boosts our efficiency and effectiveness, and the points I think are clearly made on the slide. It's also worth highlighting that our businesses have a track record of generating good returns and outcomes from what I would say is chunky platform expenditure that we've been making for a number of years. We continue to make it. But one thing we do know is we get good returns on that spend. And I think this discipline remains key. We now shift away from South Africa, and we consider our portfolio of businesses in the Rest of Africa. I think here, strategically, we are very clear about what we are growing, where we are represented and, importantly, what success looks like. This portfolio has steadily improved its performance. It is anchored, of course, by our large successful, return-generative and dividend-paying subsidiaries. And these entities also share large aspects of the platform engagement model that I've just spoken about that our South African businesses experience. Our growth subsidiaries, on the other hand, are pursuing segment-specific strategies and, notwithstanding their youthfulness in a very tough environment, have all delivered pleasing performance. We continue to keep an eye on the East African region as a market of interest for future expansion. Moving to Slide 9 and our U.K. businesses. The investment case supporting the acquisition of Aldermore in early 2018 remains solid. And the group of businesses continues to integrate and to invest in people and processes. There is a slide in the appendix which just tracks the year-to-date business case of that investment. We have made -- we have some way to go, of course, before we get fully comfortable that we have an integrated business ready to scale efficiently. Aldermore today, as you see on the slide, has very attractive features, and we remain confident of our prospects to build a larger, more valuable business in the U.K. We did transition to a new CEO in May, Steven Cooper. And I know him and the U.K. team are currently shaping the plans for their strategy going forward. All right. Now let's shift to look at the group results. Right. The group metrics on Slide 11 reflect some eye-catching annual performance. However, it is against a base that was materially impacted by COVID-related provisioning. Normalized earnings, up 54% to ZAR 26.6 billion for the year, materially driven by the decline in the credit loss ratio. Very pleasingly for us, pre-provision operating profit reflects a 5% increase to ZAR 50.6 billion. ROE up strongly to 18.4%, back within our target range. And NAV grew a solid 10%. A decent performance on managing costs saw a slight improvement in operating leverage. Strong growth in the group core equity Tier 1 ratio, climbing 2% to 13.5%. A healthy final dividend on the back of the earnings rebound and impressive capital accretion. This next slide shows the performance at a per share level on a rolling 6-month basis. So the sharp rebound in earnings in the first half accelerated in the second half, resulting in our highest-ever 6 months earnings performance. On the left-hand side of Slide 13, we reflect economic profit. That being accounting profit, lesser charge for the cost of the capital we used to generate the profit. This charge, as you can see, has lifted from 14% to 15%. We are delighted that economic profit came back strongly, growing to ZAR 4.9 billion. The ROE lift, back into our long-term range, is also very encouraging. And then on the right-hand side, the trend growth in NAV remains healthy. Considering the backdrop of the South African macroeconomic environment supporting these results, we can see top left on Slide 14 the strong rebound in South African GDP as expected. Full recovery to peak GDP may only happen in late 2022 or perhaps even early '23, although one can see the [ fate ] on the expected growth rates in the outer years. Top right, we see the large COVID-induced divergence between money supply and credit extension to the private sector. We anticipate credit extension to lift and savings growth rate to slow, such that this divergence begins to narrow. This would signal the start of a typical credit cycle on the back of rising consumer confidence and, in South Africa, the vaccine-led pickup in economic activity. Bottom left, the divergence between the rate of household and corporate credit extension. And this divergence explains much of the movement we have seen in our own lending book. Bottom right, you can see banks have seen a marked reduction in growth rates of unsecured lending. Perhaps an element of this is being provided by nonbank lenders. And then a muted pickup in the growth rate in the 2 main secured asset classes. On Slide 15, we share some macro insights affecting our U.K. businesses. U.K. GDP has rebounded strongly and should fully recover in 2022. Top right, we see the strong growth in house prices this year, assisted by the treasury support measures. U.K. policy rates remain ultra low, although unemployment has lifted from its lows, remaining susceptible to the effect of the withdrawal of the government support schemes. This next slide indicates the rebound in the group's normalized earnings, falling short of fully matching so-called previous peak earnings in 2019 by ZAR 1.3 billion. The pace of the earnings rebound has surprised us. And top right, we can see the reason for that is a materially lower income statement charge for credit risk. Bottom right shows the improvement in the credit loss ratio and also that we remain elevated compared to the 2019 year, this being the main reason for the earnings shortfall in not fully recovering that 2019 base. Looking at the balance sheet. Balance sheet provisions are reflected on this slide by stage and show increased provisions compared to the previous year-end, albeit a slight reduction compared to the first half results. And I know Harry will talk a little bit more around that. Overall, provisions and stage coverage remain robust. Across the group, advances that have received some form of payment relief because of the pandemic, still sit at just over ZAR 167 billion, spread across performing and nonperforming books. Moving to the next slide. We see the [ walk ] in group advances over the year, with the contraction in the first half starting to reverse in the second half. The appreciation of the rand has also had a marked impact. Most of the lending books, however, drifted a touch lower over the year. The group saw a continuation of a pleasing performance from the deposit franchises, as indicated on Slide 19. FNB continue to hold its #1 position in share of household deposits. Very beneficially, because of the deposit performance, the group was able to reduce its reliance on institutional funding. With the contraction in balance sheet advances in South Africa, the group added to its liquidity buffers, comprising government treasury bills. This next slide reveals the [ walk in ] group core equity Tier 1, or CET1, with 2/3 of the annual increase coming from a combination of earnings, the interim -- reduced by the interim dividend distribution and then reduced by certain regulatory deductions. Risk-weighted capital relief was mainly driven by rand appreciation. And then the ongoing capital optimization contributed just over 10% of that CET1 increase. Just for information, FirstRand Bank core equity Tier 1 grew from 12.3% at the previous year to 14.5% at 30th June 2021. Right. Let's unpack some of the operating businesses in a little bit more detail. Slide 22 reveals the group's normalized earnings of ZAR 26.6 billion by operating business. Understandably, a strong recovery across the portfolio, given the base. I will unpack the customer franchises. And the center year-on-year movement, I understand, will be covered by Harry. Right. Pre-provision operating profit provides, of course, an operational view before considering the income statement impact relating to credit, a very important view given what we've experienced with the pandemic. As Slide 23 shows, 6-month group PPOP declined to ZAR 22.9 billion in June 2020 and then materially recovered in the first half and maintained the recovery into the second half. This performance was underpinned by FNB and further aided by group treasury's funding and liquidity management and the performance of their ALM activities. On the next slide, we see the key FNB metrics. A very commendable performance, pre-provision operating profit, given this environment, up 1%. Again, the improving credit loss ratio being the reason, although it remains above TTC levels. And you can see the consequential boost to return on assets and then, of course, return on equity. Strong growth in deposits and a slight contraction in annual advances. Operating expense growth was well contained given that our ongoing investment program has continued. On Slide 25, we see some key FNB operational highlights. So importantly, top left, total core transactional customers, up 5%. We think it's a great outcome. eWallets continue to grow, demonstrating the appeal of the payment channel for FNB customers. FNB Life grew its book of business as it targets the FNB customer base. Similarly, the wealth and investment management activities are making steady progress with AUM now at ZAR 64 billion. The eBucks reward engine remains very powerful, and rewards were a touch lower this year because of a reduction in volumes. Optimization of branches and devices continued over the year, with a strong appeal for Cash Plus, the agency banking distribution model that is scaling so well in regional markets. On the right-hand side, we set out the digital performance measures, underpinned by the growth in digitally active customers. Activity and volume growth continues to scale, with average monthly digital log-ins up 12%. Overall transactional volumes for FNB were up 6%, but you can see the strong skew towards digital, up 14%. Convenience, safety and user experience continue to drive customer adoption and regularity of platform engagement. Here, we share the traction, since its launch in 2016, of Navigate Life, or we like to refer to it internally as NAV. And this is the platform ecosystem helping our customers navigate their lives in a safe and secure manner. The customer appeal for these services continues to grow. And the network effects of this NAV ecosystem build as customer engagement grows. The products and services on NAV not only aim to reduce the pain points for customers, such as renewing licenses in South Africa, but also look to improve customer outcomes in asset ownership, be that car, home or indeed money. And this is across time from acquisition to realization. The opportunity set for us here is massive. And of course, the asset then in and of itself becomes a revenue opportunity as it moves amongst our customer base. Moving to FNB Life on Slide 27. We can see top left the marked increase in claims paid to ZAR 2.2 billion, of course, the bulk of that being for mortality. Notwithstanding a torrid year for claims, the business continues to create value. New business and annual premium income for the Life business, up strongly, with credit life printing a decline given the reduction in unsecured lending. The fledgling short-term insurance business recorded a strong growth in policies, aided by the increased flow of business from home loans. We've got high aspirations for this business. And bear in mind, the customer acceptance that a lot of the short-term business is sold digitally. The fact that we can leverage our platform for this, I think, makes us very excited. So we look forward to strong growth here. Integrating the insurance business on the FNB platform is, of course, paying off handsomely as digital claims logging, fulfillment and servicing at scale are now happening digitally. On this next slide, we shift to consider the key RMB performance metrics. Normalized earnings, exceeding the 2019 base, printing at ZAR 7.1 billion. Looking at the 2 largest RMB franchises, firstly, banking, the results were ECL-driven, helped as well by an investment realization. Markets, on the other hand, saw their top line being driven by trading and execution. PPOP, steady over the year, impressive given the muted corporate activity in South Africa. And that really shows up in the RMB wholesale advances declining 13% over the year and then deposits increasing, on the other hand, as corporates accumulated liquidity. A much improved credit loss ratio drove the sharp rebound in return on equity. RMB performance was boosted, as I said, by the markets business in domestic fixed income, in particular, in the inflation book, as well as their commodities activities. Combined investment activities in RMB added ZAR 760 million of realizations. And pleasingly, the annuity earnings from the private equity portfolio recovered strongly. Banking continued to grow its customer base in a difficult market and the contraction in the wholesale book was amplified by the currency effects on the regional cross-border lending portfolio. Noticeably higher operating costs in RMB, driven by platform investments and as well as incentive normalization. Looking at WesBank, normalized earnings for WesBank are 47%, driven by an improvement in arrears, a strong focus on collections, resulting in a lower credit loss ratio. And this also played out on the associate line for WesBank where they have the joint ventures with Toyota Financial Services and VW Financial Services. PPOP, down 10%, a result of lower production over the year. New business production is seeing some risk shifts into medium risk buckets, higher LTVs and higher balloons. Advances over the year, down 3% as the business adjusted its origination approach to the competitive environment. Costs, up 7%. There was some write-off of -- accelerated write-off of software, there's investments into Nav, Car and the WesBank app and then also into systems supporting fleet management and dealer funding. We expect vehicle finance to remain competitively challenging given the shrunken size of the new vehicle sales market in South Africa. Moving to the group's activities in the Rest of Africa. Normalized earnings, up 41%, driven by an improved credit experience. Pre-credit operating results, lower on the back of lower volumes. A decline in advances. Lower endowment returns. And there is no ALM activities in this portfolio. And also then the translation effects from stronger rand. Very pleasing to see customer growth of 5% as well as the strong lift in customers adopting the banking app. FNB Africa, a pleasing rebound, an improvement across both mature and growth sub portfolios. Slide 33 shows that RMB Africa banking activity rebound was really an ECL swing and that was off the back of a much improved oil and gas sector. Markets, especially in Nigeria, here saw a contraction in profits due to a drop off in demand from investors seeking EM exposures. Moving to the U.K. on Slide 34. So just to recap, Aldermore provides finance to U.K. SMEs, homeowners, landlords, vehicle owners and also offers competitive savings products. Customer numbers grew 2%, mainly driven by the savings franchise. Normalized earnings, up materially given the significant improvement in the cost of credit. NPLs and arrears increased as Aldermore classified all customers seeking further payment relief beyond 6 months as nonperforming. This is likely to keep the credit charge and NPLs somewhat elevated for a period. PPOP, lower by 6% due to lower levels of activity across all portfolios other than MotoNovo, as well as continued investment into people and processes. Aldermore advances grew slightly to GBP 14.4 billion with customer deposits growing 14% to GBP 12.4 billion. Some further insights on Aldermore. Advances in margin mix, impacted by the build-out of the MotoNovo portfolio. Aldermore's retail and commercial advances were down 1% and 2%, respectively, a function of the competitive pricing environment as well as a slow recovery in certain commercial sectors. Very pleasingly, we can see the FRM building blocks now in place. A focus shift on the franchise value of the savings business has been something more than a source of funding and then the introduction of ALM strategies. Capital levels within Aldermore remained very strong. And now Let me hand over to Harry to look at the financial numbers in a bit more detail.

Thanks, everyone. Thanks, Alan. Good morning, everybody. This result is actually looking very different 12 months ago, very actually. And as you will have seen, actually, for a good way. So we'll start off with, I have to make the statement, comparative periods, in particular last year, 6 months to June where the pandemic actually produced a very depressed set of results, so what you see here is a significant rebound of that, so in this financial year. But having said that, it is particularly pleasing. [indiscernible] earnings is a 5% PPOP provisions. And against 2019, I'll use Alan's words, we are smidgen the way from 2019 peak, that's 5% lower. And then that actually shows the amount of effort that is taken by the business and the discipline actually within the business over the last 18 months. Alan has covered that the group position itself well to be able to pay a full year dividend, 56% payout, bottom end of our range. And then NIACC, with earnings up 54%, NIACC pleasingly back in the positive range, that is actually despite the fact that cost of equity went from 14% to 15% for the year. The group, as you've seen, continues to accrete capital with a strong ROE. Net asset value per share, up 10%. And Alan's covered a healthy CET1 ratio. And I mean that CET1 actually positions the group well for capacity for growth going forward. I'll cover the remaining parts of the slide and some of the data as we go along. We start off with pre-provision profits. Credit impairments still the theme this period, without a doubt. But excluding this, actually, what you see is a resilient performance from the business. Now this 5% pre-provision profit actually does include the significant endowment [ impact ]. So that was 300 basis points since December '19 in rate cuts. Now that is you've had a lot of the work done by the business around ALM strategies and mitigation and you'll hear that. And you'll see that how it plays out in the margins as it comes along. But starting off looking at the graph on the right you'll see that total revenues, up 4%. And again, there is an endowment impact in there, so that actually tells you how well the business actually have done. And we've covered group treasury's mitigation strategy that supported NII. The NII growth also is actually quite good, and you'll see the key driver is fee and commission income. The cost to income ratio, as Alan has covered, has decreased marginally 52.4%. And that is despite the fact that you've seen pressure on revenues, and that just shows you the impact of focus on cost, and I've got a couple of slides later. Impairment charge at the bottom improved, 44% lower to ZAR 13.7 billion, but still at elevated levels. When you move on to the income statement. And clearly, you see the biggest contributor is the change credit impairment charge. I'll cover most of these items separately. I'll just leave on this slide the impact of the tax rate. And I know we're going to get a lot of questions around that, but that's where we disclosed 2019 tax rate. It's more normalization rather than last year's lower tax rate, given the change in mix of revenue. Okay. So then moving on to the first part of the interest income slide. Balance sheet decreased year-on-year, and that clearly drives lending NII marginally down. Pick up on transactional NII, here's where you see actually the benefit of the ALM strategies because this is mainly our endowment book. Clearly, with 2% growth, where is significant benefit coming from a strong franchise of customer growth as well as a strong deposit growth as you see. Total deposits NII, that's your interest-sensitive deposits. You can see customer move to higher interest-bearing products. U.K. operations, NII is flat. Advances, growth is there. You can see effectively MotoNovo supporting that advances growth. But at the same time, you see endowment impact playing out and, therefore, margins were slightly down year-on-year. Capital endowment down, this piece here, we show you the full impact of the rate cuts on capital. So that's the gross impact. The ALM mitigation strategies together with a lot of focus on financial resource management within treasury, you can see that benefit. And that's about ZAR 2.8 billion uptick that you see year-on-year. Now as in prior periods, we do disclose our group margins excluding the U.K. operations. So that's what you see in the yellow bars between the 2. And that is largely again to state that is given the fact that they do decrease group margins given that they are a highly secured asset business. Now in December, most of you would have noted that we changed the manner which we disclose and calculate margins. The box on the top actually shows you what we do first. We take out the balance sheet growth impact. So where the growth in average balance sheet, you would have last year's margin decreasing by 19 basis points. That's the base effect of balance sheet. Everything thereafter, we give you what the rate sensitivities on the product sets. Starting with lending margin, down 2 basis points. Now it's clearly impacted by negative -- or negative against the bank in terms of asset pricing as well as the growth in NPLs, i.e., interest and suspension. This was also positively benefited. So partially offset by the change in advances mix. Overall deposit margin, up 4 basis points. Exceptional performance, again, given the endowment impact, but that's also the drive coming in from the deposit franchise of the business. And this is also supported with a lower proportion of institutional funding, and I'll cover that a bit later. As detailed earlier, you can see the treasury benefit showing up in margin, in terms of Group Treasury, with the ALM strategies on the endowment as well as capital at a higher rate. But I have to state that what you will see is more of a normalization against last year's reduction. So that is -- there is -- lies the biggest swing factor, it's just more a normalization impact. Overall margin, net-net, from 445 to 435 basis points, 10% basis points down. If you say, what if we had accepted that given the 300 basis points rate cut. Without a doubt, it actually shows an exceptional performance. Then moving on to the deposits. You've seen 6% growth in strong performance coming in across from the franchises, SA customer growth. The Rest of Africa has been impacted by currency conversion, and we're seeing strong growth in Aldermore/U.K. operations to support the funding of MotoNovo [ front ] book. Now if you just step back and you say, if you look at this deposit growth, one of the things you have to conclude is the success of the group strategy in terms of growing active customer base. 5% in this period. Certainly seen that benefit playing out in terms of deposit growth. Without a doubt is, clearly you've seen savings that Alan talked about earlier on as customers continue to save. And you see that playing out into FNB and RMB last year, in particular by creating a higher base, customers' inability to spend, therefore, for savings as well as savings for rainy days in terms of uncertainty. But to come off a high base and then to grow further this year is actually showing you adjustment of the franchise. And as I covered Aldermore growth, 14% growth in GDP deposits, supporting the MotoNovo build-out of the [ front ] book. Access liquidity clearly benefited in terms of the reduction that you see in institutional funding. Still above ZAR 300 billion, but that's a 7 basis points reduction year-on-year. And that plays out in terms of the green bar on your right. You can see lower issuances in the 12-month MTD window. Clearly, with that, you see is your weighted average term increasing to 41 months for the period. And then on the left, you can see near-decade lows in terms of the proportion weighting towards institutional funding, 27%. I'm on Slide 44, that's following on the screens. Now you'll see detail unpack, sitting in the back of the appendix books. I'll just cover on the group. Starting off with the donut, that's a composition, very little changes, still see retail sitting at 50%. On the right, we unpacked the group's impact in advances. Clearly, with the group appetite around credit growth, overall advances is down 3%. Now that you see straight in terms of performing advances growth. Now the overall distribution in terms of Stage 2 arrears as well as NPLs clearly deteriorated against last year. And you would expect that given this environment that you see. With relief last year, and I do have a particular slide on relief book, but you'll see the roll into NPLs there as well. An economic strain is well known and documented across. The decline in Stage 2 reflects both effectively strong collection efforts by the business, supported by the economy and the rebound as well as some migration into NPLs. Now the next box in the middle just tells you the balance sheet provision stock. Absolute value and balance sheet, year-on-year, a slight increase. So largely, you can say, maintained. But when you compare it to December, you'll see it's a ZAR 2.8 billion reduction in balance sheet stock. Have we stopped, stepped away and say, why? One, absolute lower Stage 2 advances. Without a doubt, that plays into it. NPLs haven't grown since December. So you don't see that strain coming in. And again, you'll hear me say the rebound in the economy clearly plays into that. And in particular, as you're aware, is that under IFRS 9, you're going to look at a forward-looking information set, much positive economic assumptions this year compared to 12 months ago. So impairment charge, overall, I have to make the statement that when you look at the coverages, they are prudently set across all stages of the book, Stage 1, 2 and 3. Clearly, we do expect and you will hear a lot about in our booklet in terms of lag impact of the economy. We still think it's elevated strain in the business, and as a consequence, we put in a temporary stress scenario. And that plays into some of the coverage, and I'll cover that later. So last statement I'll make is, and in terms of the mix, you'll see that FLI benefit or rather the positive change in macro view changes your coverage only in terms of Stage 1 by about 5 basis points. Okay. So as I stated earlier, relief book. And when you look at this picture, you have to make a statement that it's fair -- far better than what we had expected it to be. You move on to the retail portfolio, top-right. The overall relief book is down 13% -- I mean, sorry, 11%, and only about 1/3 of that is sitting in arrears, and half of that areas are sitting in NPLs. Now that picture was expected to be much worse when we had spoken 12 months ago. So it shows, a, the prudency of the approach that the business to give customers relief. And again, without a doubt, the economic rebound clearly gave the support and benefit back to you. Corporate and Commercial, actually, which you see is 52%. That's a half reduction in the overall book in terms of relief customers, far better performance than we'd expect. You see paydowns coming in, in arrears when you compare it to last year's Stage 2 variable change. U.K. operations also show a similar positive positioning overall in the relief book. And then, total group level, total NPLs of the relief book is at 6%. Again, far better performance than one would have expected. Then total group NPLs. Now the bar on the left shows we start off just showing, excluding the U.K. operations because that's covered by the yellow numbers at the bottom, total NPLs increased marginally from last year, 2%. All the graphs here are showing you the rolling 6 months. So you can see the migration in rolling playing into place. It is very pleasing to see that the reduction in operational NPLs. Now what is operational NPLs? We take away paying customers. Customers have to pay for us in a consecutive 12 months before they can migrate back to performing, so what we call technical cures. And you can see, that has actually pleasingly grown by ZAR 2.7 billion year-on-year, so effectively showing you again collection efforts by the business. U.K. experienced also NPL growth of 47% year-on-year. Clearly, the impact of economic strain as well as normalization as that book has been growing. Right. So total NPL growth, very similar levels to December. In fact, marginally down. But overall, year-on-year, 6% up across the period. And the growth is largely coming in terms of the secured books. You can see it in our U.K. operation as well as residential mortgages, and that shouldn't be surprising in the environment we are. Right. We're on Slide 48. I'll cover the absolute 44% decrease in impairments of ZAR 13.7 billion. And you can see it play out green numbers right across all the product lines. You can see against last year's significant uptick, and the improvement this year is in line with what you had expected given the rebound. But whether you look at the [ 127 ] basis points, excluding all the [ Morgans TDC ] levels or even the [ 106 ],the conclusion you have to get to is that the credit impairment is still at elevated levels. Now this busy slide unpacks the drivers of the ZAR 13.7 billion charge, and I'll go through component pieces. So let's start off with the biggest part of the book. The performing book advances down 3% since June, 5 basis points reduction in terms of coverage from 100 to 95 basis points. So clearly, you see the benefit of that too is an 8% reduction sitting in balance sheet stock of Stage 1, just above ZAR 800 million. Now when you look at the coverage across product sets in the detail, what you will see is coverage actually increased in SA and the rest of Africa. Now that's the growing uncertainty and stress scenario that we're adding into play. The coverage decrease in commercial, largely FLI impact is far more pronounced within that book. And similarly in the U.K. environment, given the substantial change around positive macro view, you have coverage reduction sitting in that piece in terms of Stage 1. Stage 2 advances, net decrease of 9%. What you do see is effectively only a 5% reduction in stock as a consequence of effectively coverage increasing. Without a doubt you see the play of that additional temporary stress scenario playing in to both the formation of Stage 2 advances, rather some of the coverage. Now in terms of the RMB piece, and I have to stress that effectively, it's more migration. So yes, Stage 2 reduction there, it's a combination of certain counters being settled in the period or lower balances given cash settlement as well as migration. And what you see is that migration in terms of provision, just moving from Stage 2, so it's reflected as a reduction, but actually just flows into the NPL coverage, which, in fact, given the mix change of the book, you see coverage increasing 2% to 45% year-on-year. Now the write-offs in that, I'll cover next. So when you look at this slide, you look at the middle and you look at the bottom. What that clearly depicts is the change in balance sheet stock. Last year was an increase of ZAR 15 billion just in the balance sheet provisioning. This year was actually much lower at ZAR 1.2 billion. And you see it across the different stages of the book. The middle bar on top reflects the 29% increase in gross balances of customers. Yes, we do have provisions last year, but that provisions in terms of moves, in terms of balance sheet provisions at the bottom. So this just picks up the gross write-off impact. And what you see is similar levels of post write-off recoveries playing out in terms of the credit charge. Right, leaving credit behind me on Slide 51. Total NIR is up 6%. Operational NIR, when you explain some of the associate income, is up 3%. Now that does have prior year base impact in terms of lower activity during lockdown. However, lots of moving parts, but one of the pleasing one is actually positive growth in fee and commission income. And what you see on the top-left here, grown 5%. Yes, economic rebound, but you have to take into account the fact that there was near 0 headline fee increase last year July. So you see the benefit of the 5% customer growth playing out in fee and commission income. The 2% reduction against December, not to be alarmed, that's just more cyclicality, December is Christmas month, in all fairness. Insurance, I'll pick up on the next slide as we go in detail. Alan spoke about double markets. What you -- when you see this in terms of a 6 months ROL, last year, they had a great 6 months in June in terms of uncertainty in the market. It was actually quite strong growth, and they grew further this period, which actually is commendable in this environment for global markets. Investment income, private equity as well as the principal investment, you've seen good growth in income, supported clearly by the realization that you've seen earlier of ZAR 200 million. But it's more the resilient annuity income in the base that you see. The red bit is impairments against principal investments, much lower than last year, but clearly at nearly ZAR 300 million, still at elevated levels. Insurance, Alan covered in terms of the impact of claims as well as claims provisions. You see this play out in that 15% reduction in total income coming from the insurance book. And it plays across both the cell captives, third-party licenses as well as our own product licenses across. And yes, it is a theme of mortality and mortality elevated provisions. Private equity performance, you can see the dark bars. That's effectively a resilient growth in annuity income. And that's both against new and old vintages, which performed strongly for this period. The performance did get supported by about ZAR 400 million realizations, and that's what you see on the gray small bar on top. Without a doubt, we still see strength in the portfolio. We've taken just over ZAR 500 million of impairments against advances made to investor companies. And remember, we look at these advances at a much elevated provision level. It is akin to effectively shareholder loans and we'll disclose that separately. And then what you see in terms of the rebound in terms of the portfolio valuation, ZAR 4.4 billion against last year's ZAR 3.3 billion. That is actually coming off the strong growth in the annuity income. And with the rebound, you can see some pressure in terms of new investments in the current year, and it's only about ZAR 300 million of investments, was new investments were made. Growth in operating expenses, 3%. That's actually reflecting continued focus on cost management across the businesses. And that is, again, despite the fact that we expense investments through the P&L as much as possible in terms of our policy. Okay. So looking at overall the group, as I said, we continue to invest in technology and platform, and Alan has given you a lot of detail in the beginning in terms of the works that have been done. And that does result in overall what you see at the bottom, is total technology-related costs up 12%, including computing expenses up almost 30%. Staff expenditure is still the single biggest component of overall cost, 60% of the group's cost base, grew 5% in totality. It's impacted clearly with the rebasing of the variable Rem with earnings recovering across. Overall, balance pull is up lower than earnings growth, but up at 25% for the full year. And we've actually published our remuneration before this morning. So a lot of detail for those that want to go into the pieces. But with earnings rebound and ROE coming strongly up, you can expect that. So that's 33%. And why is it different to the 45% pool growth? It's largely because you've got some timing lags in terms of how accounting plays out in terms of the deferral. Direct cost growth, direct staff salary cost, up 3%. Now salary growth last year, unionized has always been above inflation. You had senior managers at SA. So you see some of the benefit. It actually plays off more in terms of a 3% reduction in terms of core headcount. This slide just shows you the trajectory over 5 years. And I think you can see, when Alan says we've invested decade-long strategy in terms of technology. Just over the last 5 years, you can see, yes, operating expenses. And I take out U.K. operations because U.K. operations is only come in from 2018 onwards, [indiscernible] in particular. And you can see overall cost compound growth, 5%. But when you take away the compound growth of nearly 13%, 12.8% in IT costs bit, you can see effectively operating costs excluding that is 3.2% growth. And that is after we installed fairly-paid staff at effectively that growth rate, but headcount increase is 5% compound over the period. So cost focus, yes, elevated over the last 12 to 18 months, without a doubt. But you can see cost focus theme has continued, as you seem to just be able to invest and spend. Right. I'm on the last slide. Just to sum up, I'm not going to go through all the stats you've heard me leaving that. But what I want to leave you with is what you can see is strong performance across all drivers. Business, in all fairness, has emerged in a strong position. We actually said to shareholders that, that's the objective, we emerge from a strong provisioning on credit, strong capital position. And I think we're in a strength position to effectively capitalize as the group goes forward. Thank you very much.

Thank you, Harry. We're in the finishing straight here. Right. Looking through the telescope. Yes, on Slide 60, we can see the macroeconomic outlook for our two most important markets. Global activity is reaching pre-COVID-19 levels, although already the growth balance that we have seen is starting to fade. Regarding the U.K., we do expect inflation to peak within the next 6 to 9 months before moderating after the initial bouts of reopening price pressure begin to fade. U.K. unemployment, we see peaking at around 5%. And so far, we have not seen any material uplift in unemployment, given the tapering of the job support schemes. The resources shortage in some U.K. industries and also the focus on retraining employees should be positive for that labor market. On U.K. housing, the market appears to have weathered the taper of the stamp duty holiday, and we see only a modest correction in prices in 2022. The recovery in South Africa GDP, on the other hand, is expected to take a little longer. The local economy, of course, is benefiting from a commodity price bounce, with private sector activity, as you've seen, still relatively weak. We expect the commodity tailwind to fade near term, although ESG considerations should provide some longer-term support. Locally, the policy rate easing cycle has certainly ended. And we expect a low but gradual lift in rates with inflation well contained. On this next slide, we see the growth challenge that is facing South Africa. Worryingly, GDP per capita on the left-hand side displays a depressing trend, notwithstanding the current strong cyclical tailwinds. On the right-hand side, the much spoken about structural reform program is now somewhat a race against time. The reform momentum is, however, slowly picking up. And this slide highlights the well-known opportunities for South Africa to materially lift its potential growth rate. Moving to the last slide. As Harry said, we are feeling much better than the last time we spoke. We feel good about our digital platform strategy execution, our competitive customer propositions and improving customer experiences, and the recent performance of the FNB brand now being recognized as the most valued brand, not just in banking, but in South Africa being a good indicator of this. The operational strain, which has been significant over the last 18 months, has been weathered. We are feeling more constructive on the recovery in the local market, and hopefully the start of a sustained consumer-led credit cycle. This should see a return to better growth rates for lending books in the sector. Let me end with some thank yous to our many regulators. Their input is always very well considered. They -- it is professional and it makes us a better business. To our loyal customers, of course, without your support, we would have no business. And then finally to our people, who ultimately have made a difference to much better results that you have seen today. Thank you very much for your attendance, and we will now take questions. I do have the team here. So please make use of [indiscernible].

Alan and Harry, James Starke from Morgan Stanley. Just one question from me. Regarding your dividend profile from here, your capital generation looks very strong. Capital demand looks relatively soft to work in a Tier 1 is pretty high. Can you give us some color on what we can expect from your payout ratio? It certainly looks like you can do a lot more from here.

Yes. Thanks, James, for that. Yes, we didn't think you would miss the capital accretion that has taken place. I mean, we [ did ] move the payout ratio into the bottom end of the range. It is a long-term range, so we try to kind of take sort of a 3-year view on that. I guess, that was in anticipation of better growth coming through. I think if you look in the appendix, I think you can certainly see some increased activity coming through in the last quarter of the financial results. In some of our asset classes, the last 3 months have been very good for us. Instructions in mortgages have been almost at historic highs over the last 3 months. So all of that, I think, is going to slowly translate into better demand for capital, and that's really where our mindset is. Of course, if it doesn't eventuate and accretion continues, then -- and we can't deploy it, we don't sit on capital. So we will do the appropriately to maintain our returns. Any other questions in the room? Okay. Melanie ?

Okay. We've got some questions from the webcast. Chris Steward from Ninety One. Your South African retail credit growth has lagged peers somewhat of late. With the benefit of hindsight, would you change this? What would you need to see in the operating environment to resume retail advances growth to rates more in line with the peer group?

Okay. So Chris, to answer your question, maybe I'll give a little bit of an intro. Then I'm going to give it to Jacques. But I guess, in hindsight is always good. We -- I think if we are honest with ourselves, we probably left some business on the table around mortgages in our domestic market. I think we didn't fully anticipate the activity coming on the back of low interest rates. And so it took us some time to get going there. As I say, over the last 3 months, it's been good. But I think we left a little bit of business on the table there. Now I think, equally in WesBank, I think it took us a little bit of time to calibrate to the competitive environment. But I don't know, Jacques, if you got a mic.

Yes, I think the only thing to add to that is, clearly, there is also a price play there at the moment that we also have to defend some of the margins there. And so it's not about rushing sort of the books at the market, but also be able to get some returns out of the stuff. The nice thing about our strategies is they've never really been credit-led. So our storyline's around -- apologies, our storyline's around getting the client franchises book don't necessarily just hang off credit, but it is nice to lock those clients in the credit storyline. So to the extent that those demands are there, we have enough distribution capabilities to execute into it. So we've reconfigured and calibrated all of our scorecards and open to business. On the ground, lots of pipeline activity. So we don't see that as something that we can't draw back in to the extent that the opportunity is there very quickly.

Okay. Another question from Chris Steward. Please unpack the ZAR 2.8 billion group treasury impact on margins. What activities does this describe?

Okay. Harry?

Yes. So Chris, I know you're going to give me a hard time when we meet, so I can give you a lot more detail. But the high-level stuff is -- let's have a look at last year. And there's a fair amount of impact you see in terms of the funding part of it. So that's one, normalization. So that's probably about maybe a little bit more than 50% is more of a normalization impact of that. The second piece is, you can see the ALM strategies payout strongly within that, in particular against what treasury manages the capital base. So you'll see a piece around that. And those probably are the biggest drivers around that area. We can talk a lot more in terms of FRM, so Financial Resource Management, where you see that interest rates currency play clearly with no longer funding the MotoNovo growth book that's coming out of Aldermore. You can see the run-up book in MotoNovo in the back book. So you can see that against expense of currency funding. So there's lots of moving parts, big thing, Chris. Just have a look at last year in terms of the significant reduction last year and the normalization thereon.

And Jacques, do you want to add anything, or you're happy? Okay.

Okay. Then we have a question from Londiwe Buthelezi from Fin24. You mentioned that FirstRand anticipates that it will achieve peak earnings earlier than 2023. What exactly do you mean by peak earnings? Is it surpassing pre-COVID-19 levels? Are we looking at H1 2022 or financial year 2022?

Okay. Thanks for that question. I guess, there's been a market narrative around how businesses have been impacted by the pandemic and how long it will take them to get back to where they were pre-pandemic. And the year that the market seems to focus on is 2019. So if you had been steadily growing pre-pandemic, it is very likely that the 2019 year would have been the year where you would have shown your peak earnings. And indeed, that was the case for us. So I guess, for us, it's the speed and the quality of the rebound, how quickly can we get back to that. So we did end the year ZAR 1.3 billion short on normalized earnings. In terms of matching that, of course, that's not the target. We would like to do better. In terms of when that's going to happen, I mean, we use the words on the slide that we think it will be imminent restoration to peak earnings. I think if you look at the last 6 months of production, it was our highest-ever 6 months generation of earnings. And so it is imminent, it's clearly going to happen in this next reporting period. And then, hopefully, we can try and do a bit better on that. So that's really the -- we don't really want to give more, I think, guidance on earnings than that. Thanks, Londiwe.

Okay. Then we have another question from Murray Winckler from Laurium Capital. FNB had a great ROE of 33% and a 1.9% credit loss ratio. What should we expect as a normalized range for these two numbers?

Yes, may go for that question. So clearly, the environment stress hasn't disaffected. So where we land for the June number now is still at an elevated level. Now with advances growth coming in, with Alan saying, you have some origination strain, et cetera. But having said that, I think next year that you'll probably see it flick marginally down across that. I mean, there's a debate around when it trends back to TDC levels. We're probably not going to see that in the short term. But there is a clear expectation of marginally lower chart what you see in the next 12 months.

Sorry. And the ROE range?

ROE range, so we're still thinking be definitely strong in terms of capital generation. And when Alan makes a comment around where you see back to peak earnings, so we are expecting earnings growth with capital generation. So you still see some benefit coming into ROE. We are at the bottom end of our range. ROE is one of the things that doesn't flick that quickly. Yes, it did flick last year to this year, but that you can see the impact of credit impairments. So you will see it trending upwards, but it could be a while where we get to the top end range, and probably a long while.

No further questions from the webcast.

We have questions on the lines. First question comes from Warwick Bam of Avior Capital Markets.