integrated financial services 2003 Annual Report 1966/010753/06 Share code: FSR ISIN code: ZAE 000014973 (“FSR”) FirstRand is an integrated financial services group structured with critical mass to take advantage of the blurring of boundaries in the financial services industry and the convergence of products and services. The group provides a comprehensive range of products and services to the South African market and niche products in certain international markets. These products include: Banking Insurance Retail banking Life Insurance Investment banking Health Insurance Corporate banking Asset management Private banking Employee Benefits Short-term Insurance FirstRand is differentiated by its unique business philosophy, de-centralised structure, owner- manager culture and portfolio branding strategy. Contents Group economic overview 2 Stratco executives 61 Chairman’s report 4 Corporate governance 62 CEOs’ report 10 Remuneration policies 66 Group structure 15 Workforce profile 68 CFO’s report 16 FirstRand Group financial statements 2003 69 Sources of profit 27 FirstRand Banking Group financial Operational review 28 statements 2003 107 Board of directors 56 Momentum financial statements 2003 195 Executive committee 60 Shareholders’ information 267 An separate abridged Sustainability Report is published as part of these financial statements and contains additional information relating to stakeholder relationships. 5th consecutive year of superior growth Since the creation of FirstRand in 1998 the diversified earnings base of the Group has delivered core headline earnings growth at a compound rate of 20% per annum, to double from R2.5 billion in 1999 to R5.1 billion in 2003. Post-AC133 Pre-AC133 Headline earnings (%) +3 -4 Core headline earnings (%) +30 +23 Dividend per share (%) +23 +23 Total assets under management or administration (R billion) 490.3 489.2 Core headline earnings (R million) Dividends per share (cents) Net asset value (R million) Compound annual growth Compound annual growth Compound annual growth in core headline earnings: 20% in dividends per share: 23% in net asset value: 19% 35.00 5 151 22 286 28.50 19 084 4 186 23.75 3 450 15 366 19.00 2 954 12 757 15.50 2 516 11 133 99 00 01 02 03 99 00 01 02 03 99 00 01 02 03 Group economic review Nevertheless, South Africa could not completely escape the influence of international developments. Weakening exports contributed to the reappearance of a current account deficit in the first half of 2003 after more than a year of surpluses. Weaker exports also contributed to economic growth slowing down throughout the year under review. The weaker growth, as well as the slowdown in the demand for credit which accompanied it, Rudolf Gouws also stemmed from the four increases in the Reserve Bank’s repo Chief economist, rate in the course of 2002. This tightening in monetary policy was Rand Merchant triggered by the rise in inflation that followed the sharp decline in Bank the Rand exchange rate during the second half of 2001. The four interest rate hikes, coupled with the current account Over the past year, the world economy recovered only slightly surpluses that prevailed throughout 2002, as well as the fall of the from the downswing of 2001. The United States (“US”) economy Reserve Bank’s net open foreign currency position, contributed to grew well below trend, and the economies of South Africa’s major a sharp reversal in the Rand’s fortunes. It rose by 25% in trade- European trading partners, as well as Japan, remained deeply weighted terms through 2002, and by a further 15% through the troubled. The build-up to and the outbreak of the US-led war in first half of 2003. The Rand appreciation, in turn, unfortunately Iraq impacted on consumer and business confidence worldwide, compounded the adverse impact of the world economy on South and created uncertainties that will influence global economic African exports and the domestic economy. activity for some time to come. The lingering weakness in the US economy was such that, by June 2003, interest rates had been However, the sharp rise in the value of the Rand had the cut to levels not seen in 45 years. These interest rate cuts, beneficial effect, midway through FirstRand’s past financial year, coupled with the impact of tax reductions, should revive the US of helping to reverse the uptrend in inflation. By June 2003 the economy, but the necessity to adapt to major imbalances (such prospects for further falls had improved to such an extent that as a large current account deficit and high household and the way was cleared for the Reserve Bank to cut its repo rate by corporate debt levels) may mean that the US economy will be 150 basis points. Two further cuts of 100 basis points each growing below its potential for some years. followed in August and September. Lower interest rates, along Fortunately for South Africa, the monetary and fiscal discipline of with the improvement in real disposable incomes of households the last decade, coupled with the much greater competitiveness brought about by falling inflation, should help the economy to of domestic industry following the opening up of the economy to regain vigour. international competition, has made the domestic economy less vulnerable to adverse external developments. These policy FirstRand views the slowdown of late 2002 and the first half of strides have been recognised by international credit rating 2003 as a pause in what had, by mid-2003, already become the agencies and, in May 2003, two agencies revised upwards South longest upward phase of any business cycle in the more than five Africa’s sovereign international credit ratings. In the same month, decades since the end of the Second World War. While a range Government was also able to raise long-term foreign capital at of policy-, political-, social- and skills-related factors will continue very favourable interest rates. Previous economic upswings were to constrain South Africa’s growth (and with it the economy’s often brought to a halt by the rapid emergence of balance of ability to create sufficient jobs and alleviate poverty), longer-term payments constraints that prompted tightening of policy and prospects for more sustainable growth of above 3% have reining in of domestic demand. improved considerably. 2 Annual Report 2003 but this may have been partly neutralised by activity gains in the services sector of the economy. The 2004 financial year is expected to see further change in relative sector performance, as falling interest rates become the main booster of economic activity. The budget deficit can be expected to reach its maximum expansionary influence, and will start shrinking anew relative to GDP, Cees Bruggemans reducing its support for domestic demand. Meanwhile the Rand Chief economist, could still firm more before peaking out. Though stronger global First National Bank growth should favour mining commodity prospects, a firm Rand could restrain manufactured exports for some while longer. Notwithstanding these conditions further slowing GDP growth, the The relative performance of key sectors in the South African greatest single booster of economic activity during the 2004 financial economy changed greatly during the 2003 financial year, as export year is likely to be falling interest rates. This will be particularly positive performances weakened and domestic activity continued to be for domestically oriented activity. favoured. The fall in interest rates has already had the effect of boosting new Early in 2003, the economy was supported by a weak Rand car purchases and supporting property market and new construction averaging R10:$1. This induced strong profit growth and business activity early in the 2004 financial year. Durable and semi-durable confidence, with the RMB/BER Business Confidence Index recording consumption spending is expected to be well supported as falling high readings of 68 in two consecutive quarters. inflation and interest rates boost consumer purchasing power. This expectation is widely prevalent in the higher income group, which As 2003 progressed, the Rand steadily appreciated, reaching R7:$1. increasingly considers the present “a time to buy consumer This firming of the Rand, along with slowing global trade, bit deeply durables”, according to the FNB/BER Consumer Confidence Survey. into export performances and some company profits in the second half of the 2003 financial year. Mining and manufactured exports In contrast, lower income groups may be expected to benefit particularly suffered, slowing GDP growth. less from these trends, as labour shedding is likely to continue. Non- This externally induced slowing of GDP growth was only partly durable consumer spending may as a consequence remain relatively neutralised by sustained growth in domestic demand, made constrained. possible by a widening budget deficit. In the course of the 2003 financial year, the budget was allowed to become more The overall fall-off in the FNB/BER Consumer Confidence Index in expansionary, mainly through a planned increase in public spending. early financial 2004 is a cause for concern. It reflects the growing This boost was reinforced by unplanned tax revenue losses as strain experienced by exporters and import-competing businesses export profitability suffered. The consequent increase in the budget caused by the Rand’s strength and the manner in which this has deficit by some 1% of GDP neutralised, to a large extent, the fall-off started to influence consumers. in external demand. The main beneficiary of this change was domestic consumer spending, favouring retail and manufacturing On balance, the positive and negative influences are expected to largely activity. Investment spending also kept up well, mainly linked to even out during the 2004 financial year, allowing moderate GDP growth long-term mining projects. to be achieved. The sectors gaining most from these influences should continue to rotate, increasingly favouring consumer durables and semi- The increasing strain experienced by exporters and import- durables, new car purchases, property and new construction, and the competing businesses during 2003 led to renewed labour shedding, services sectors supporting such domestic activity.