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Healthier credit book boosts Sasfin’s earnings by 32%

Sasfin has invested some R50 million in emerging businesses, which includes digital initiatives.

NOMPU SIZIBA: Financial services company Sasfin released their annual results today [Tuesday] for the 12 months ended June. The company reported that headline earnings per share rose 31.42% to 501 cents. It is attributing the improvement in earnings to a better credit-loss ratio of 102 basis points, compared to 197 basis points in the year before. The banking arm, including associates of the company, saw income growth of 8.9% while their asset management division – that is Sasfin Wealth – recorded income growth of 11.2%.

Well, to break down what’s what for us, I’m joined on the line by Michael Sassoon, the group CEO of Sasfin. Michael, Thanks very much. You are reporting good headline growth, earnings are up nicely, and your total asset base is up nearly 2%. To what do you attribute these metrics?

MICHAEL SASSOON: Nompu, thank you very much for having me on your show, and good evening to your listeners. I would hazard to say, as you mentioned, the biggest contributing factor was the improvement in the credit-loss ratio, 102 basis points, which is now more in line with our historic credit-loss ratio, which kind of puts that solidly between, say, 90 basis points and 120 basis points. We have put quite a bit of effort into advancing our credit capabilities, both in terms of originating credit and in terms of assessing and evaluating credit.

And we, as a business lender very much focused on the SME market, are exposed to the South African economy via our clients. And therefore, ensuring that we can carefully select clients and advance credit to those clients in a way which is sustainable, and will help them grow to the right quality client, is critical to our sustainable growth – and I think that is something which came through in these results.

NOMPU SIZIBA: How are you seeing the small business segment? How are they coping with the backdrop of the very lacklustre economic situation?

MICHAEL SASSOON: It is very difficult, and it is particularly difficult, I think, in a small business in the South African context. If you are supplying government, or you are supplying big business, both of whom tend to be notoriously bad payers, you are under pressure. And if you are in heavy manufacturing, or in construction, or in those sectors, that can be quite a big drain on your earnings. We did see that by the way we were dropping earnings in our stats and capital unit, where have a private equity portfolio made up of South African businesses, where we carefully revalue some of those businesses downwards.

But, that being said, there are pockets of excellence within the small business sector, and I think there are opportunities to advance credit to businesses in the sector, but you have to be very cautious at the same time.

NOMPU SIZIBA: Your total income was a mere 2.21% – that’s at R1.246 billion – but, when you disaggregate that, you didn’t do too badly in the area of banking and your wealth business. What measures did you put in place there to push the income growth up in those areas?

MICHAEL SASSOON: On the banking business, last year in March we acquired Absa’s rental finance business, a business called ATFS, and that business is now in our base. When we bought that business, it was in excess of R1 billion of loans. Those loans still have a run-off profile, so those loans have dropped quite a bit, but we’ve managed to successfully replace those loans with organic loan growth in the second half of the year. We also are starting to see some good growth in income, albeit off a low base, off our digital business banking platform, Beyond. So, those were the contributing factors to the income growth in the banking pillar.

In the Wealth pillar, there really were three major factors which aided the growth. One is the associate income. We acquired a business together with management from Saxo in Denmark, the local Saxo business, called DMA. We are a minority shareholder in that business. We also increased our stake in Efficient, which is a listed group, and we saw some decent earnings growth in that associate.

And then on the core business earnings side of the wealth business, we saw growth in offshore assets under management, which is really in our private-client business, and we saw meaningful growth in our institutional asset-management business, which won two Raging Bull awards for the year ending December 2018 for its Flexible Income Fund. That growth, however, unfortunately was offset by a difficult local market, where a good chunk of our clients are invested. But overall we were able to achieve good growth in that pillar.

NOMPU SIZIBA: What do you attribute to the cost-to-income ratio rising by 5.13 percentage points?

MICHAEL SASSOON: Our cost growth exceeded our income growth in the year that’s gone by, and we are investing in some emerging businesses. Our net spend in emerging businesses is in the region of R50 million, which is a meaningful amount. That includes our digital initiatives, where we think we have built a really competitive and compelling offering for small businesses, as well as in terms of what we are doing around originating specialised credit opportunities or loans in the Sasfin Capital area. So, there has been investment in the business. That investment we believe will result in improved results in the future.

NOMPU SIZIBA: What’s Sasfin’s dividend policy, because it looks are though shareholders are getting somewhat less that what they would normally do relative to your earnings?

MICHAEL SASSOON: That’s correct. Historically Sasfin typically paid out 40% of headline earnings as a dividend. This year our board has taken a decision to reduce that to 20%. We are seeing the opportunities to grow our risk-weighted assets, which is an important strategic objective to attain the scale that we want in the business. And in order to do that we felt that we needed to preserve some capital, which would give us sufficient ammunition to be able to originate more risk-weighted assets, which we think will drive better earnings in the future.

NOMPU SIZIBA: Alright, Michael. We are going to leave it there. Thank you very much, sir, for your time.

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