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Operational Review Bank Grindrod Limited 2019 Integrated Annual Report OPERATIONAL REVIEW BANK Key achievements 2019 • Enhanced independence of the Board and refreshed executive management. • Reverted management focus to core banking services following the separation of the investment arm into Group. • Finalised the business model to drive the provision of platform-banking services. • Categorised Lending activities to measure and increase assistance to SMEs. • Improved credit rating by GCR Ratings to A-(ZA). Key challenges 2019 • Addressing the requirements of increased regulatory oversight. • Managing exposure and risk amid subdued economic activity and political turmoil. • Containing costs. • Diversifying income streams. • Managing capital adequacy ratios following increases in risk weighting on the loan book. • Managing bad debts and impairment in the loan book. 92 Grindrod Limited 2019 Integrated Annual Report Key focus areas 2020 • Stabilise operations and implement lessons learnt from the COVID-19 pandemic. • Progress transformation at all levels. • Drive growth in SME lending. • Finalise and market the platform-banking offering. • Source suitable strategic partners to fuel business growth. • Continue to achieve legislative and regulatory compliance. 93 Grindrod Limited 2019 Integrated Annual Report Operational review: Bank continued KEY INDICATORS CONTINUING OPERATIONS Economic Revenue 38.1% R350 million (2018: R566 million) Trading Profit 48.7% R94 million (2018: R183 million) Operating profit 52.5% R80 million (2018: R169 million) Attributable profit 24.6% R83 million (2018: R111 million) 94 Grindrod Limited 2019 Integrated Annual Report Social Environmental Number 1.5% Water usage 1 6.6% of employees 8 728 kl 206 employees (2018: 8 186 kl) (2018: 203) GHG emissions 23.3% LTIFR 2 Zero (CO2e) 0.00 3 251 tonnes (2018: 0.00) (2018: 2 637 tonnes) Training spend 108.3% Scope 2 3.4% R2.5 million GHG emissions (2018: R1.2 million) (CO2e) 2 388 tonnes Social 4.3% (2018: 2 471 tonnes) responsibility spend Scope 3 419.9% R2.2 million GHG emissions (2018: R2.3 million) (CO2e) 863 tonnes (2018: 166 tonnes) ENHANCED INDEPENDENCE OF THE GRINDROD BANK BOARD AND REFRESHED EXECUTIVE TEAM 1 Includes joint ventures and associates at 100% shareholding. 2 Total GHG emissions including scope 3 (tonnes CO2e). 95 Grindrod Limited 2019 Integrated Annual Report Operational review: Bank continued Contribution to Revenue (%) Contribution to Trading Profit (%) 7% 6% The Bank unlocks stakeholder value through a range of initiatives aimed at growing the traditional banking business and creating an enabling governance and funding structure. 2019 REVIEW The Bank’s trading profit declined to R94 million (2018: R183 million). Significant progress was made with the Grindrod strategy of unlocking value by splitting the management of non-core banking activities out of the erstwhile Financial Services to create a stand-alone bank which would be adequately funded to grow its business and expand into new sectors, notably SME services. The subdued economy, turmoil and conflicting messages in politics, evidence of increasingly poor SOEs performance and the threat of ratings downgrades made for a difficult trading environment. This was exacerbated by increased regulatory oversight following the liquidation of VBS Mutual Bank in the last quarter of 2018. 96 Grindrod Limited 2019 Integrated Annual Report Stringent enforcement of regulations and requirements affected the entire banking sector. At Grindrod Bank, it resulted in revisions of bad-debt criteria and financial-instrument classifications, which required corrective action that impacted on provisions to cover revised capital adequacy ratios (CARs) and expected credit loss. Expected credit loss provision increased to R82 million (2018: R45 million). As a result, combined with the effect of the SASSA-contract exit in the second half of 2018, attributable profit decreased to R83 million (2018: R111 million). However, the Bank remains adequately funded following a R100-million capital injection. Its credit rating, assigned by Global Credit Rating Company (GCRC) improved from BBB+(ZA) in 2018 to A-(ZA) in 2019. These ratings reflect the bank’s established niche business model, coupled with its resilient financial performance. Lending, the core traditional banking business, decreased advances to R7.4 billion (2018: R7.8 billion). The property book was consistent with no bad debts. Preparation to increase the focus on SME business included analysing SME considerations and setting up the initial product offer accordingly. The analysis indicated that the Bank already has SME loans to the value of R1.6 billion on its books. Treasury, which funds lending activities, grew its deposit base by 6% to R11.19 billion (2018: R10.51 billion). The value of its listed bond-investment was increased by an additional R250 million subscription. Corporate Finance, active in the JSE-sponsor market, again experienced modest but stable earnings due to subdued corporate-transaction activities. Capital Markets reported solid earnings on its R1.7 billion third-party preference share investment product, generating R9.9 million (2018: R9.0 million). Retail geared itself to enter the platform-banking market, offering fintech customers a platform through which their customers can transact. Market needs have been identified and marketing opportunities focused on appropriate potential customers. 97.
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