NOMPU SIZIBA: Financial services firm Sasfin came out with their interim results today [Tuesday March 19]. For the six months ended December 2018 the bank reported headline earnings up 59.89% at R80.5 million. Total income rose 5.78% to R608.6 million. The company says its cost profile came under pressure following an acquisition. Its cost-to-income ratio stands just below 74%. As with other financial services firms, the company did note that the South African economy has been in a tough operating environment.
To break down the numbers for us I’m joined on the line by Michael Sassoon, CEO of Sasfin Holdings. Michael, on the face of it your headline earnings are basically 60%. That looks impressive. To what do you attribute that?
MICHAEL SASSOON: First, thanks for having me on your show. The primary reason for headline earnings being up is that in the previous financial year we had a spike in our credit losses; our credit performance has improved. The credit-loss ratio went from 200 basis points to 123 basis points, and we took some steps in strengthening our credit functions. So that was the one primary driver.
The other driver was that in the previous year we had some once-off tax adjustments due in part to a change in tax legislation, which didn’t repeat in the current financial year.
So those are the two primary contributors to our headline earnings growth.
NOMPU SIZIBA: Your costs grew by 12.31%, and you are attributing that to an acquisition that you made. Just elaborate on that and, when I look at your cost-to-income ratio, it does look relatively high compared to the industry average.
MICHAEL SASSOON: Our cost-to-income ratio is high, and we would like to bring it down. We expect some cost growth by year-end to come down, hopefully into single digits. We acquired the Absa Technology Finance Solutions rental finance book [ATFS]. That came with a team, and there was a cost attached to that. As a small banking group which has a different spread of income to what the larger banks have, we especially keep an eye on that; they typically have a high cost-to-income ratio. I don’t think we’ll ever get the kind of big-bank cost-to-income ratio. But if we can get our cost-to-income ratio to the mid-60s to high 60s – we are currently close to 74% – then that should enable us to deliver a return on equity to our investors in the high teens.
NOMPU SIZIBA: Right. And what is your return on equity right now?
MICHAEL SASSOON: It’s just about 10.5%.
NOMPU SIZIBA: So how did your banking business perform in the period under review? And what does the performance tell you, particularly about the SME business sector and how it’s managing in the current economic circumstances?
MICHAEL SASSOON: The banking business did relatively well. The big part of that improvement in impairments did enable that pillar to grow its bottom line. The SMEs are under enormous pressure in South Africa. We grant credit to creditworthy SMEs and companies in construction and manufacturing – we all know how they are reported to be doing. These businesses are under enormous pressure.
But as a relatively small bank we think there are enough good stories of businesses in South Africa for us to identify potential clients to lend to, in a way that will result in decent growth for our business.
We also launched our digital banking platform for SMEs at the beginning of 2018, and that’s going really well; the intention is to incorporate further services and products into the digital banking platform, including credit and foreign exchange. At the moment it’s a transactional banking capability with accounting and payroll and invoicing, and we are very excited about that initiative, which we think will take the hassle out of banking for lots of small businesses which typically struggle with their banking functionality at the larger banks.
Then in our asset finance business, which is the largest part of the banking business, we see good scope for growth, especially around developing and creating financial instruments for other asset types – for example, solar or energy-efficient asset types. We are growing our asset base. We are in the process of integrating a number of systems into one, which should result in a better client experience and greater efficiencies.
Our final part of that business is really lending to medium-sized businesses. As I say, the key to success there will be around identifying good creditworthy clients whom we can get close to and turn around decisions very fast, because typically these businesses, when they do need credit, they need it quite urgently.
NOMPU SIZIBA: These medium-sized companies you’d be looking at – could you potentially curb other banks’ market share?
MICHAEL SASSOON: Well, that’s the hope. That’s what we are looking to do. We found that many of these businesses want a solution. They are too small to warrant the attention of the senior executives in the big-bank environment, and they are too big to just be dealt with by a very automated standardised branch approach. Therefore we see that there is real relevance for us in that market, where we can get closer to them, we can go and visit them, we can understand their business. We will often meet these clients, have critical meetings with these clients. Our senior executives tend to meet the clients, and that enables us to understand the clients a bit better, to understand that, even if on a pure credit scorecard they might not look the most obviously creditworthy. When you get a bit closer to them you can understand their growth potential, you can understand the downside risk, and that enables you to approve faster credit and slightly more credit that what they might typically get. We think we are very well positioned to cater to that market, which has really been at the heart of our business for many, many years.
NOMPU SIZIBA: You explained it quite well. I suppose once you adopt the tick-box exercise you could miss real gems of clients. So ja, getting to know them better makes sense, I guess.
And what about the performance of your wealth pillar? I see profit there grew by 8.31% to around R25.8 million.
MICHAEL SASSOON: The wealth-business equity markets to the end of December 2018 were quite tough. South African equity markets have been very tough; even global equity markets ended in a lull in December 2018. They bounced back a bit at the beginning of this calendar year, and that put us under a bit of pressure. Our assets under management did drop somewhat in that business. The all-share I think dropped 11% over the period, and our assets under management dropped just over 5%.
In the wealth business there are three kind of key highlights. The first is in our asset management business, where we recently won two Raging Bull Awards for one of our income funds. Our investment performance and track record is now pretty good over three and five years across all our asset classes. We’ve also taken major steps to improve our transformation in that business. We really connected to transformation after Wiphold became a shareholder of ours in 2017, and the Asset Management is today is a level-1 BEE contributor. As far as BEE level-1 asset managers are concerned, based on their track record, and on the governance within our environment as a banking group, we think we are really well positioned. We are quite excited about the growth prospects of that business, seeing that we’ve only been in this for a few years, and it takes time to build credibility with institutional investors.
NOMPU SIZIBA: What level of appetite did you see for offshore investment, particularly among your wealth clients? I see that area of your business did grow.
MICHAEL SASSOON: The private-client side of the business – that business is today more and more a global wealth and portfolio management business. We went through R10 billion of global assets under management in that business in the second half of last year. Our foreign income has grown 22% year-on-year. So, it might no be the greatest story for South African investment markets, but equity markets in South Africa have been tough. High-net-worth investors and private investors are looking for global asset management offerings and portfolio management offerings.
We’ve taken big steps with our team to kind of improve our product sets, improve our offering, and there is a huge appetite to continuously grow our clients who are looking for offshore portfolio management.
NOMPU SIZIBA: So what’s the outlook for the rest of the period?
MICHAEL SASSOON: We are pretty optimistic that this kind of trajectory we are on should unfold for the balance of the year, so we are hoping to grow off our current base. And then we’ve invested significantly in technology. We also announced a couple of weeks ago our alliance banking relationship with Hello Paisa. Hello Paisa is an incredible business which is offering banking to the unbanked. It has 350 000 clients who use it for remittance and money transfer. Those clients are obvious bank clients. These are typically clients who are underbanked, and we leverage all our digital banking capabilities into that space with a really great partner.
There are a number of other initiatives in the business which we are quite excited about in the medium term.
NOMPU SIZIBA: Our thanks to Michael Sassoon.