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