Old Mutual FY18 profit rises to $300 mln but remains cautious on inflationary pressure

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HARARE – Old Mutual Zim­babwe Limited, the country’s leading financial service giant said its after tax profit for the year ended 2018, rose 37% to $300.7 million from $219.3 million in 2017 backed by cost containment measures and a steady topline growth, but warned that inflation growth still poses a risk to investment returns.

Of the PAT, the life insur­ance business, banking unit, holding company contributed 59%, 16% and 14% respec­tively. The general assurance business contributed 7% while the asset management business accounted for 4%.

At an analyst briefing OMZL chief executive of­ficer Jonas Mushosho said the group managed to mitigate the rise in expenses in a market characterised by inflationary pressures and acute shortages of foreign currency. Annual in­flation in the Southern African nation closed the year 2018 at 42.09%. However, Zim­babwe’s treasury is optimistic that inflation will close 2019 below 10%.

In the period, the group’s operating and admin expenses declined 3% from $98.8 mil­lion in 2017 to $91.4 million in 2018.

“We managed to contain operating expenses in the face of hyperinflation in the last quarter of the year. The decline in expenses is encouraging in an operating environment characterized by inflation, demonstrating the fruits of the investments we have been making in Information Tech­nology Systems. We can now realise efficiencies and reduce expenses without compromis­ing the growth in customer services,” he said.

As the group seeks to con­solidate its market presence and improve operating efficiency, it expanded its host co finan­cial services shop concept by launching 2 additional green zones in 2018, bringing the total number of green zones to 8. The new green zones were in Chinhoyi and Mutare.

Net client cash flows were up 74% to $166.2 million on the back of a growth in life income as well as growth in non-life sales. Total revenue excluding investment return increased 14% to $397.5 million.

“…a growth which was through all our business units was a result of new business acquisitions, client retention, growth in loan book, increased volume of transaction and growth in funds under man­agement,” Mushosho stated. A 49% growth in transactions on Mobile and POS platforms to $190.5 million was archived over the period.

In an inflationary environ­ment, the company saw its cost to income ratio improving from 62% in 2017 to 57% in 2018. Net loans and advances was up 17% to $780 million over the period as a result of mortgages, salaries loans and loans to corporates. However, the group’s loan book was sup­ported by a 15% increase in customer deposits.

Funds under management surged by 52% to $4.1 billion largely on a combination of net client cash flow generated by businesses gains on Zimbabwe Stock Exchange (ZSE) equity investments.

On the agricultural space, the company also scaled up its weather index insurance prod­uct after starting with a pilot project.

On the line business, bank­ing and lending’s net profit went up by 15% from $42.1 million to $48.6 million. For the life insurance business, gross written premiums went up 10% from $160.3 mil­lion to $176.9 million while general insurance business’s gross written premiums was up 9% to $41.4 million. Asset management business sales in­creased 9% from $318.5 mil­lion to $345.8 million.

Our Thoughts on Old Mu­tualThe financial group saw its profits rise 24%, driven significantly by price appre­ciations in its equity holdings after the ZSE went on a bull run prompted by currency hedging. This saw the Asset management division’s profits rise highest at 64% among the groups operating segments. The group’s core revenue gen­erating division, Life Assurance posted a profit growth at 46%. All in all, the nominal figures generated in the financial year were positive, although a look at the 2018 Annual Inflation figure of 42% paints a less pos­itive picture in real terms.

Looking ahead for 2019, the introduction of the new func­tional currency has mitigated the option of ZSE listed stocks as an inflation hedge and the market has subsequently been on a losing run. Anticipating no short term changes to the economic outlook, the bearish market sentiment is expected to hold, meaning the group is unlikely to experience the same sort of performance for 2019. The issue of the impact of the new functional curren­cy was also discussed during Friday’s analyst briefing. The group noted that from a bal­ance sheet perspective our for­eign currency denominated as­sets are actually more that our foreign currency denominated liabilities, so the impact of any devaluation to the currency is actually net positive”

He also noted “From an income statement perspective that really a judgement call de­pending on when during the year you consider there was a functional currency change. If you consider that as the 1st of October, when the RTGS and nostro accounts FCA were re­quired to be split, then the im­pact is minimal as it is only one quarter”The group’s core insur­ance operations saw positive growth in the customer base despite the real income ero­sion from inflation. Positively, the life assurance unit outper­formed inflation. The general assurance division performed less strongly, with the infla­tion caused mismatch between insured values and premium payments credited for pulling profits down. On that, insur­ance companies have been au­thorized to adjust their premi­um rates in line with inflation which should bode well for Old Mutual moving forward.

The group’s statement of fi­nancial position is in healthy state with a capitalization ex­ceeding the target by $132.5 million. Speaking on this group CEO Jonas Mushosho commented “You saw from the capital position of the group we have adequate capital and therefore we will seek to ex­pand and deploy that capital in various sectors of this econ­omy, that give people support, that are economically viable and will generate appropriate returns for us. So we have the appetite for more investments in our core areas of financial services and also other areas we see opportunities”.

Expectations are that the group will look to invest in­creasingly more in property, specifically in the hospitality and tourism sector. The group revealed that it was eyeing construction projects in Vic­toria Falls and was assessing Hwange. The economic en­vironment is hardly ideal for commercial property invest­ment, particularly in the CBD where void rates are reportedly on the climb. On the other hand, with the local currency expected to continue losing value putting the funds to use quickly in capital assets might be a sensible move to preserve value although unlikely to gen­erate large gains immediately. – FinX