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Modest improvement in two key areas but installment slump got worse

Modest improvement in two key areas but installment slump got worse

The money and banking statistics for April, released on Friday 01 June 2018 by the Bank of Namibia continue to paint a rather bleak overall economic picture, but there are two small specks of improvement which stand out against the stagnant background.

The first is the healthy growth in mortgage credit to the private sector which rose by a not-insignificant 7.9% compared to April last year. This continues the rising trend which first started in February this year. The growth rates year to date are somewhat less than the comparable growth in the first four months of last year, but they come off the lofty tops of 2016’s first quarter when not everybody realised a major correction was already underway.

It is important to note that mortgage growth in 2015 and the first semester of 2016 was stellar. Although growth slowed down considerably in the second half of 2016, and throughout 2017, it remained positive, in other words, mortgage lending did not stop growing during the recession, it continued to expand only at a much slower pace. Unlike installment credit, it never stalled which would have been disastrous for the commercial banks whose loan books are carried in the order of 40% plus by mortgages.

It is also notable that the Bank of Namibia said the April growth was mainly due to a “rising demand for commercial property loans by the business sector.” This is indeed an encouraging sign. It shows that there is more momentum in the private sector than meets the eye. Mortgages are long-term commitments and were it not for a positive expectation of future business conditions, companies will be loathe to sign for long-term loans which they know will restraint their access to working capital if their anticipated growth does not materialise.

So regardless of what business confidence indicators show, there is sufficient evidence of confidence in a large enough slice of the private sector to merit their investments in property. Reciprocally, there is adequate confidence on the side of the banks to extend these loans which says a lot about current valuations compared to a year ago.

It will probably be a very long time before we see annual mortgage growth of around 15% like we had at the beginning of 2016 but it is important to remember that very few people at that stage realised there is serious trouble on the way. The fact that mortgage growth remained positive in 2017 and year to date in 2018, reflects in a sense, not only the underlying resilience of the broader economy, but also the important role of property investment for future expansion. After mortgages have grown by 15% for a period, it is almost impossible to maintain this growth rate. At some point, demand saturation sets in and the rate slows down but as long as it keeps growing, it shows confidence in the power of fixed capital investment to drive future operational expansion.

The second inspiring statistic is the marginal rise in Private Sector Credit Extension. It rose by 0.1 of a percentage point, definitely not a sterling move, but it provides tentative confirmation that the slump in PSCE has probably bottomed in December last year and January this year. PSCE is also an aggregate statistic and must be handled with circumspect. Looking at the underlying components it is clear that credit demand by individuals continues to moderate while businesses are actively looking for more of it.

The various credit categories generally constitute short to medium term commitments so as such may not reflect future expectations as accurately a mortgages, but the obvious difference between household and business demand indicates consolidation in the one category (households) and improved prospects in the other (commercial).

There is now a discernible trend in the demand for commercial credit, having turned in January and continuing year to date to improve every month. In April commercial entities demanded and received 4.1% more credit than in April 2017, while the March growth rate was still a conservative 3.7%. Nevertheless, business credit is by far the single biggest contributor to the overall private sector credit growth of 5.8%

The black hole in the statistics, however, is still the contraction in installment credit. It seems neither private individuals nor companies have an appetite for large ticket items, in our case specifically vehicles, which lead to another month of contraction. In April this type of credit shrunk again, this time by an even bigger 5.2% after the significant contraction of 4.3% in March. Installment credit has now contracted for 11 consecutive months, wiping out most of the gains of 2016 and 2017. Vehicle sales are now starting to look like the construction sector from the second half of 2016 onwards.

If installment sales shrink for another month, it would mean that auto dealers have endured a full year of decreasing sales. Note, it is not growing at a slower rate, it is getting smaller by the month.
Imagine running a car dealership on 2018 overheads and operational expenses, but having to fund this from sales comparable to 2012. I think this is almost impossible and I suspect the automotive industry is in serious pain.



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Sanlam 2018 Annual Results

7 March 2019


Sanlam’s 2018 annual results provides testimony to its resilience amid challenging operating conditions and negative investment markets

Sanlam today announced its operational results for the 12 months ended 31 December 2018. The Group made significant progress in strategic execution during 2018. This included the acquisition of the remaining 53% stake in SAHAM Finances, the largest transaction concluded in the Group’s 100-year history, and the approval by Sanlam shareholders of a package of Broad-based Black Economic Empowerment (B-BBEE) transactions that will position the Group well for accelerated growth in its South African home market.

Operational results for 2018 included 14% growth in the value of new life insurance business (VNB) on a consistent economic basis and more than R2 billion in positive experience variances, testimony to Sanlam’s resilience in difficult times.

The Group relies on its federal operating model and diversified profile in dealing with the challenging operating environment, negative investment markets and volatile currencies. Management continues to focus on growing existing operations and extracting value from recent corporate transactions to drive enhanced future growth.

The negative investment market returns and higher interest rates in a number of markets where the Group operates had a negative impact on growth in operating earnings and some other key performance indicators. This was aggravated by weak economic growth in South Africa and Namibia and internal currency devaluations in Angola, Nigeria and Zimbabwe.

Substantial growth in Santam’s operating earnings (net result from financial services) and satisfactory growth by Sanlam Emerging Markets (SEM) and Sanlam Corporate offset softer contributions from Sanlam Personal Finance (SPF) and Sanlam Investment Group (SIG).

Key features of the 2018 annual results include:

Net result from financial services increased by 4% compared to the same period in 2017;

Net value of new covered business up 8% to R2 billion (up 14% on a consistent economic basis);

Net fund inflows of R42 billion compared to R37 billion in 2017;

Adjusted Return on Group Equity Value per share of 19.4% exceeded the target of 13.0%; and

Dividend per share of 312 cents, up 8%.

Sanlam Group Chief Executive Officer, Mr Ian Kirk said: “We are satisfied with our performance in a challenging operating environment. We will continue to focus on managing operations prudently and diligently executing on our strategy to deliver sustainable value to all our stakeholders. The integration of SAHAM Finances is progressing well. In addition, Sanlam shareholders approved the package of B-BBEE transactions, including an equity raising, at the extraordinary general meeting held on 12 December 2018. Our plan to implement these transactions this year remains on track.”

Sanlam Personal Finance (SPF) net result from financial services declined by 5%, largely due to the impact of new growth initiatives and dampened market conditions. Excluding the new initiatives, SPF’s contribution was 1% down on 2017 due to the major impact that the weak equity market performance in South Africa had on fund-based fee income.

SPF’s new business sales increased by 4%, an overall satisfactory result under challenging conditions. Sanlam Sky’s new business increased by an exceptional 71%. Strong growth of 13% in the traditional individual life channel was augmented by the Capitec Bank credit life new business recognised in the first half of 2018, and strong demand for the new Capitec Bank funeral product. The Recurring premium and Strategic Business Development business units also achieved strong growth of 20%, supported by the acquisition of BrightRock in 2017. Glacier new business grew marginally by 1%. Primary sales onto the Linked Investment Service Provider (LISP) platform improved by 5%, an acceptable result given the pressure on investor confidence in the mass affluent market. This was however, offset by lower sales of wrap funds and traditional life products.

The strong growth in new business volumes at Sanlam Sky had a major positive effect on SPF’s VNB growth, which increased by 7% (14% on a comparable basis).

Sanlam Emerging Markets (SEM) grew its net result from financial services by 14%. Excluding the impact of corporate activity, earnings were marginally up on 2017 (up 8% excluding the increased new business strain).

New business volumes at SEM increased by 20%. Namibia performed well, increasing new business volumes by 22% despite weak economic conditions. Both life and investment new business grew strongly. Botswana underperformed with the main detractor from new business growth being the investment line of business, which declined by 24%. This line of business is historically more volatile in nature.

The new business growth in the Rest of Africa portfolio was 68% largely due to corporate activity relating to SAHAM Finances, with the East Africa portfolio underperforming.

The Indian insurance businesses continued to perform well, achieving double-digit growth in both life and general insurance in local currency. The Malaysian businesses are finding some traction after a period of underperformance, increasing their overall new business contribution by 3%. New business production is not yet meeting expectations, but the mix of business improved at both businesses.

SEM’s VNB declined by 3% (up 6% on a consistent economic basis and excluding corporate activity). The relatively low growth on a comparable basis is largely attributable to the new business underperformance in East Africa.

Sanlam Investment Group’s (SIG) overall net result from financial services declined by 6%, attributable to lower performance fees at the third party asset manager in South Africa, administration costs incurred for system upgrades in the wealth management business and lower earnings from equity-backed financing transactions at Sanlam Specialised Finance. The other businesses did well to grow earnings, despite the pressure on funds under management due to lower investment markets.

New business volumes declined by 13% mainly due to market volatility and low investor confidence in South Africa. Institutional new inflows remained weak for the full year, while retail inflows also slowed down significantly after a more positive start to the year. The international businesses, UK, attracted strong new inflows (up 57%).

Sanlam Corporate’s net result from financial services increased by 4%, with the muted growth caused by a continuation of high group risk claims experience. Mortality and disability claims experience weakened further in the second half of the year, which is likely to require more rerating of premiums in 2019. The administration units turned profitable in 2018, a major achievement. The healthcare businesses reported satisfactory double-digit growth in earnings, while the Absa Consultants and Actuaries business made a pleasing contribution of R39 million.

New business volumes in life insurance more than doubled, reflecting an exceptional performance. Single premiums grew by 109%, while recurring premiums increased by a particularly satisfactory 56%.

The good growth in recurring and single premium business, combined with modelling improvements, supported a 64% (71% on a comparable economic basis) increase in the cluster’s VNB contribution.

Following a year of major catastrophe events in 2017, Santam experienced a relatively benign claims environment in 2018. Combined with acceptable growth in net earned premiums, it contributed to a 37% increase in gross result from financial services (41% after tax and non-controlling interest). The conventional insurance book achieved an underwriting margin of 9% in 2018 (6% in 2017).

As at 31 December 2018, discretionary capital amounted to a negative R3.7 billion before allowance for the planned B-BBEE share issuance. A number of capital management actions during 2018 affected the balance of available discretionary capital, including the US$1 billion (R13 billion) SAHAM Finances transaction. Cash proceeds from the B-BBEE share issuance will restore the discretionary capital portfolio to between R1 billion and R1.5 billion depending on the final issue price within the R74 to R86 price range approved by shareholders.

Looking forward, the Group said economic growth in South Africa would likely remain weak in the short to medium term future, and would continue to impact efforts to accelerate organic growth. The outlook for economic growth in other regions where the Group operates is more promising. Recent acquisitions such as the SAHAM transaction should also support operational performance going forward.

“We remain focused on executing our strategy. We are confident that we have the calibre of management and staff to prudently navigate the anticipated challenges going forward,” Mr Kirk concluded.

Details of the results for the 12 months ended 31 December 2018 are available at