Old Mutual defies economic headwinds

By Phillimon Mhlanga

Despite a challenging operating environment characterised by a deepening liquidity crunch, which has eroded confidence in the financial services sector, the country’s integrated financial services group, Old Mutual Zimbabwe (OMZ), registered a stellar performance during the year to December 31, 2016.

OMZ, which is part of a diversified international financial services group listed in London and on the Zimbabwe, South Africa, Malawi and Namibia bourses, recorded triple digit growth in profit during the review period.

The group’s profit increased by 590 percent to US$91,8 million during the year to December 31, 2016, compared with US$13,3 million posted in the prior year. This was underpinned by strong performances in its banking and insurance businesses as well as the recovery of the stock market towards the end of 2016.

Adjusted operating profit, which comprises operating profit plus a normalised investment return, slightly increased to US$76,1 million during the year under review, from US$$76 million reported in 2015. The group has since declared a dividend of US$0,0414 per share.

Jonas Mushosho, the group chief executive officer who is also regional chief executive officer for Old Mutual Emerging Markets for southern and east Africa, told analysts at a briefing held in the capital last week: “We are very excited about the strong results that we have delivered in a very difficult environment. I think these are (extraordinary) results. Our business remains robust, and I think we are taking advantage of a well capitalised and diversified business which provides a strong foundation to be able to withstand difficulties in our economy.”
Zimbabwe’s economy has been deteriorating over the years, especially last year, posing serious risks to the sustainability of business growth.

Mushosho noted: “The stock exchange was volatile during 2016. I think it was reacting to different pieces of information that came through during the year. Early in the year, there were issues around indigenisation, which unsettled the market, but that was then clarified by President Robert Mugabe. In May, there was an announcement about the introduction of bond notes. And that had a huge impact on our market. A lot of people in our market became very jittery and uncomfortable. It became very evident that this was going to have a huge impact on our business. We also saw the monetary authorities capping lending rates during the year. ”

Takura Mudekunye, the group’s finance director, said: “We are very happy that we managed to withstand the difficulties that we faced during the period under review. We are very excited to see growth despite the fact that our customers are facing serious difficulties. The group is well capitalised. Cash flows remain positive. We are proud that we have continued to drive the business into the future. We have also been able to generate value for the shareholders and we hope to continue.”

OMZ generated strong cash flows, with cash and cash equivalent at the end of 2016 increasing 18 percent to US$161,9 million, from US$137 million recorded during the previous year.

The group registered good revenue growth, which expanded by 126 percent to US$460,5 million recorded during the period under review, underpinned by strong performances in investment income from non-banking and gross earned premiums. In 2015, OMZ reported a revenue of about US$203,8 million.

OMZ’s total expenses went up 90 percent during the year to US$361 million, from US$189 million recorded in 2015.

In tandem with the growth in gross revenue, Old Mutual’s banking business, the Central African Building Society (CABS), which is Zimbabwe’s largest mortgage lender by assets, remained as the key growth catalyst for the group, recording a growth of 38 percent to US$39,2 million from US$28,4 million recorded in the same period in the prior year. Loans and advances increased by four percent from US$563,1 million to US$583,2 million. The bank recorded a credit loss ratio of 0,1 percent, down from 2,4 percent reported in the prior year.

In fact, the financial results show that CABS was the largest contributor to profits, contributing 51 percent. Last year, CABS contributed 37 percent to profits.

The performance was driven by the maintenance of stable net interest margins despite a cut in interest rates.

Fees, commission and other income, however, went up due to increasing transactional volumes in the banking sector.

The group’s financial position or balance sheet looks very solid. Its assets rose nine percent to US$2,16 billion, from US$1,98 billion, a position which was driven by the growth in loans and advances, investments and securities and cash and cash equivalents.

Total liabilities increased by 7,6 percent to US$1,8 billion during the period under review from US$1,7 billion recorded in 2015, underpinned by growth in policyholder liabilities, in line with the growth in matching assets.

Mushosho said he was happy with the quality of the loan book after some recoveries in the year under review. This resulted in credit loss and impairment charges falling to US$3,5 million, 79 percent down from US$16,4 million registered during the year to December 31, 2015. Credit loss ratio was down from 2,4 percent in 2015 to 0,1 percent.

During the period under review, Old Mutual invested a total of US$79 million in Treasury Bills (TBs).

An investment analyst remarked that it was prudent for Old Mutual to have “less exposure to TBs compared to other banks which have committed huge amounts of their money in government’s debt instruments”.

“It actually shows the thinking at Old Mutual that they are not deploying much of their money in the government paper because they don’t hold much value. This is why they have less exposure to TBs, meaning they can easily deploy their money elsewhere where there are good investment opportunities. This is not the case with those banks that are exposed to huge amounts of money committed in TBs.”

Government has not been able to pay for TBs on maturity, and has in fact had to roll-over a number of these money market instruments on maturity.

There are growing fears that due to the economic troubles, characterised by the cash crisis, company closures and rising unemployment, government will find it increasingly difficult to pay for the TBs when they mature.

To worsen the situation, TBs have valuation concerns. The Financial Gazette’s Companies & Markets understands that there is no agreed valuation formula in the country at the moment and this has created problems.

CABS, is planning to launch a housing project in Bulawayo, the country’s second largest city.

CABS managing director, Simon Hammond, said: “We have land allocated to us in Nkulumane area in Bulawayo. We will fully service about 1 000 stands. Servicing of the stands will start in the next coming few months.”

Old Mutual’s life and short-term insurance businesses registered a 10 percent growth in operating income from US$6,2 million in 2015 to US$6,8 million during the period under review.

Gross written premiums went up by three percent to US$36,9 million in 2016, from US$35,9 million in 2015.

The life unit’s operating income took some hefty blows, falling 27 percent in 2016 to US$21,8 million, from US$29,9 million reported in prior comparable period the previous year.

This was largely due to actuarial assumption changes and the enhancement of policy holder reserves.

Operating profit for the investment unit went down eight percent from US$7,2 million to US$6,6 million. However, funds under management at the asset management business increased by 13 percent to US$1,8 billion, from US$1,6 billion recorded in 2015.

The country’s property market remained depressed by compromised income quality and tight market liquidity conditions.

Consequently, Old Mutual’s property investment during the year under review came off a bit due to difficulties in the economy, dropping four percent from US$408,4 million in the previous year to US$392,6 million during the period under review.

OMZ will set up a micro-financial bank next month after it secured an operating licence from the Reserve Bank of Zimbabwe. This new unit will cater for Zimbabwe’s growing informal sector.

Zimbabwe’s economy is now highly informalised, with statistics showing that at least 94,5 percent of Zimbabweans are informally employed.

Mushosho said: “The microfinance business has been licenced and in April this year, the unit will open its doors to the public and will make funding more affordable. Our staff that spent time attached to Faulu Microfinance Bank in Kenya, which is part of the Old Mutual Group, are back and are spearheading the establishment of the microfinance business. We will be charging interest of about five percent per month. This is part of our efforts to advance financial inclusion.” Financial Gazette