Highlights and challenges

9 Operational review BIDVEST financial services Alan Salomon Chief executive The division, comprising Bidvest Bank and Bidvest Financial Services, offers a comprehensive range of financial products and insurance services. Bidvest Bank, holder of a full banking licence since 2000, is South Africa s leading foreign exchange specialist, serving retail and corporate customers via 100 branches nationwide. Foreign exchange and global payment expertise is complemented by deposit-taking, loans and fleet and asset finance. The bank provides the country s widest range of foreign bank notes as well as pre-paid foreign currency cards in 12 currencies. The bank is South Africa s third largest vehicle leasing business. Bidvest Insurance is aligned with leading underwriters and offers a wide range of covers, supported by customer-friendly aggregation services. Products include motor insurance, personal, household and commercial lines and life cover. Our stakeholders include employees, suppliers, our shareholder, communities and customers. Communication is continuous with all of them but the focus is on the customer. Both the banking and insurance businesses are customer-centric. Data is managed and mined to determine customer preferences and needs. Training instils our customer orientation. Highlights and challenges Bank balance sheet has robust liquidity and return metrics New and revised insurance products linked to auto Strong underwriting result Very competitive banking environment Successful launch of new brand, Bidvest Insurance Good performance from insurance joint ventures Alan Salomon Chief executive

10 Financial performance REVENUE TRADING PROFIT - 2 000-600 1 474,4 1 676,7 1 715,7-1 500-1 000 478,8 518,9 586,7-500 - 400-300 - 500-100 Environmental performance GREENHOUSE GAS EMISSIONS Emissions (tonnes CO 2 e) 15 000 12 000 9 000 6 000 3 000 0 4 3 2 1 0 Intensity (tonnes CO 2 e per R million revenue) Social performance CSI Scope 1 Scope 2 Intensity TRAINING ABSENTEE RATE (percentage) (R 000) 4 000-3 500-3 000-2 500-2 000-1 500-1 000-500 - 0-1 130 1 956 3 483-1,9,8,7,6,5,4,3,2,1 as % of trading profit 30-25 - 20-15 - 10-5 - 0-15,1 16,4 27,4 1,6% 1,4% 0,9% - 2,0-1,5-1,0.5 % of trading profit Bidvest SA average %

11 Operational review BIDVEST financial services continued Material issues and risks Global online payments Continued growth in non-traditional niche banking Intense competition Highly regulated environment Prolonged period of low interest rates impacts earning potential Strong alliances and associations necessary to support international growth was maintained and there were no significant write-downs or impairments. Bank deposits grew by 31% to R1,8 billion (2011: R1,4 billion). Loans and advances eased higher to R2,39 billion (2011: R2,38 billion) and the bank s total assets increased to R4,1 billion (2011: R3,6 billion). The bank remains highly cash-generative. Nature of business The division, comprising Bidvest Bank and Bidvest Insurance, offers targeted, niche financial products in a variety of areas. Bidvest Bank is one of South Africa s leading foreign exchange specialists. Travel and corporate foreign exchange products and global payments are complemented by deposit-taking, loans and fleet and asset finance. The bank provides the country s widest range of foreign bank notes and pre-paid foreign currency cards and offers a low-cost account for unlimited banking transactions. Bidvest Insurance through its Brokerage division is aligned with leading underwriters and offers a comprehensive range of motor and household insurance. Bidvest Insurance has both a life insurance and long-term insurance licence, offering products such as vehicle warranties and maintenance plans, funeral cover, tyre insurance and vehicle chip and dent cover. Material issues and business risks Financial services competition is intense and highly regulated. Compliance and governance are key focus areas at both the bank and insurance operations. The product and service offering is under constant development, but the banking franchise remains tightly focused. A five-year fleet leasing contract with Transnet came to a close in the second half, highlighting the need to widen the customerbase and product mix. The business has held a full banking licence since 2000, creating scope for product development. A prolonged period of historically low interest rates impacts earnings potential. Increasing regulatory rigour across the banking sector, locally and internationally, creates challenges and opportunities in the near term. Strong global associations and alliances are necessary to support international growth. Bidvest Insurance traditionally generated business through one channel the dealerships of Bidvest Automotive creating a diversification challenge. A lot of focus and work over the last year went into expanding the product suite while presenting proposals to a number of affinity partners. Smart, cost-effective marketing is essential to stand out in a financial services market dominated by major players with high visibility and substantial marketing spends. Performance and trading conditions Pleasing performance was registered off the previous year s high base. Targets were exceeded. Divisional trading profit rose 13,1% to R586,7 million (2011: R518,9 million). The segmental result was restated to reflect the allocation and payment of commission and profit share from the insurance business to Bidvest Automotive of R169,1 million (2011: R122,7 million). In a highly competitive environment, innovation drove growth at Bidvest Bank: Profit after tax reached R317,0 million (2011: R283,5 million). Prudent bank lending policy The bank generated excellent ratios and returns: the return on equity was 19,4%, the return on assets 7,6%, with financial leverage at 2,5 times and a cost-to-income ratio of 52,5%. The bank complies with Basel III ratios well ahead of their implementation date. The bank s Moody s rating was unchanged at A3.za/P-2.za with a stable outlook. The ratings agency issued a favourable credit report. Bank transaction volumes grew, but the value per transaction traded slightly lower. Rand weakness was marginally positive. Insurance volumes rose through the traditional Bidvest Automotive channels while alternative revenue streams were developed. Insurance product innovation contributed to pleasing growth in group premiums, up 12,8% to R330,9 million (2011: R293,4 million) while 19,9% net policy growth was achieved. Expenses in the insurance business were well controlled and show like-for-like growth of 6,9%. The investment portfolio at Bidvest Insurance grew by 30% to R1 043 million (2011: R801 million) and its equity element delivered a return of 18%. The statutory insurance companies are well capitalised and meet the Financial Service Board s (FSB s) current solvency assessment and management requirements. The insurance underwriting profit was 39% up on the prior year, a highly pleasing performance. Highs and lows Bidvest Insurance a new insurance brand was successfully launched into the retail

12 insurance space through a multi-media campaign. Response was highly positive. The Group s brand equity adds substantial value in a highly competitive environment. Yamaha Financial Services continues to grow. Volumes of insurance business through non-automotive channels are gaining momentum in the market. Joint-ventures with Wesbank and Hollard put in a good performance. Claims expenses were well controlled at lower or similar levels to the prior year on improved claims procedures. Visa granted Bidvest Bank an issuing licence, enabling the business to launch its highly successful World Currency Card (WCC) range into international markets. WCC volumes were buoyed by continual expansion. By year-end the range covered 12 currencies the widest currency card offering in South Africa. During the year the bank introduced South Africa s first cards denominated in Israeli shekels, Indian rupees, Chinese yuan, Brazilian reais and Argentine pesos. New currency roll-outs are planned in the new year. Increases in deposit volumes at Bidvest Bank were driven by strong marketing of the bank s dual-purpose, low-cost transaction and savings account. The same flexible platform enabled the bank to introduce customised packages for selected market segments. The bank s relaunch of Global Payments Online (GPO) late in the previous period helped to popularise realtime bill settlement via the Internet and contributed to growth in global payments for corporate customers. Money transfer volumes via MoneyGram declined following the entry of new market players. Leasing rental income was negatively affected by the expiry of the five-year vehicle leasing contract with Transnet in March 2012. Infrastructure associated with the contract was right-sized. The strategy of diversifying the lending and leasing customer mix delivered good results and new corporate gains contributed to greater balance. The bank s total staff complement rose to 1 285 (2011: 1 228) as a result of growth across various business channels. New business growth was underpinned at the bank by a rise in new customers and the value of new accounts. During the year, 160 000 new South African customers opened accounts. The bank s customer-base now exceeds 1,5 million. Four new bank branches were opened and refurbishment continued as many branches were reconfigured to meet the requirements of customers accessing the bank s expanded product base. Expense control remained robust. In the second half, the bank launched a new approach to branch management in line with the Group s decentralised model. New model managers are now expected to function as business unit leaders responsible for growing their own volumes, profits and efficiencies. By year-end the new approach had been adopted at more than a quarter of the branches. Accurately targeted advertising entrenched the profile of Bidvest Bank while establishing the new Bidvest Insurance brand. Our stakeholders contribute to a sustainable business Our stakeholders include employees, suppliers, our shareholder, communities and customers. Communication is continual with them all, but the principal focus is on the customer. Both the banking and insurance businesses are customer-centric. Data is managed and mined to determine customer preferences and needs. Training instils customer orientation. Staff development and performance management are a priority across the division. Training spend rose to R27,5 million (2011: R16,4 million). The bank s graduate recruitment and training programme entered its second year and has proved successful in feeding quality industry entrants into growth areas. The health and wellbeing of our employees is also a focus area. Bidvest Bank invests in robust risk management processes, not only in response to regulatory and governance requirements, but to support the bank s own rigorous approach to the management of its business and its focus on ethical standards. Governance and risk management functions were further strengthened at the bank and by the second half a 70-strong compliance cluster was in place. It is divisional policy to implement appropriate systems ahead of time. One example was Bidvest Bank s introduction in the first half of the Treating the Customer Fairly (TCF) programme that the FSB will soon make mandatory across the financial services sector. Many TCF features relating to disclosure, complaints handling, fair and honest dealing and customer treatment are already built into the division s way of doing business as are the programme s training and ethical requirements. In future, TCF will be incorporated into all skills development training. Work on TCF was at an advanced stage by year-end. The bank is an accredited education and training provider to NQF level 5. Sustainability champions and committees ensure constant progress on sustainability issues. The division is working towards paperless administrative systems and makes energy-saving initiatives. The insurance business offices are in a green rated building where sustainability is a key focus. Corporate social investment totalled R3,5 million and was targeted at 28 initiatives. Progress on B-BBEE is a priority. Bidvest Bank excelled during the year, resulting in a

13 Operational review BIDVEST financial services continued re-rating from Level 3 contributor status to Level 2 in August 2012. The development of black people into senior positions requiring Reserve Bank approval remains a challenge. Employment equity scores were bolstered at Bidvest Bank by the initiative to employ graduates and create a pool of future black managers. Ten disabled black female learners were employed and were enrolled in an intensive learnership programme. Strong focus on performance management has driven significant improvements and prompted succession planning for key individuals. An executive development programme is in place at the bank to develop those with high potential (27 candidates were enrolled on the 2012 programme). Empowered procurement is another focus area. The bank IT system was upgraded to ensure supplier details are uploaded promptly and valid B-BBEE certificates are logged. The bank spent R16,6 million to support enterprise development. Its supplier-friendly policy ensures prompt payment. IT progression The division s IT investment rose marginally to R31 million (2011: R30 million). System reliability is critical. Regular IT audits are carried out to ensure defect-free operation without capacity constraints, current or for the next five years. The work of external specialists is complemented by in-house systems and controls. The division is an innovator. Data is mined to track trends and needs and highlight cross-selling opportunities. The figures are interrogated by management and inform strategy formulation and product development. IT systems are also a crucial governance and compliance tool and are constantly refined. In the coming year, Bidvest Insurance plans to invest in a new core IT system so as to effectively service its multi-product, multi-channel business model. A project to source a suitable system is currently in progress. Future Competition will remain intense and no immediate change is foreseen in the low-interest rate environment. However, double-digit growth in revenue and earnings will be sought. The strategy of developing specialised niche products and then widening the product offering has proved itself. After five years of sustained growth on this pattern, a solid foundation has been established that will permit expansion of the division. Product innovation and the identification of new distribution channels are key focus areas at both Bidvest Bank and Bidvest Insurance. The insurance business continues to grow its revenue streams from sources other than Bidvest Automotive dealerships. This process is expected to gain impetus. Continued growth from the insurer s core channel will not be neglected. Good results were achieved by the Bidvest Insurance outbound call-centre in 2012 and further gains are expected. Opportunities will be pursued to expand through alternative marketing channels and by finding new affinity partners through which to white label products. Broker partners will be sought and a strategic acquisition that complements the business will be investigated. Three growth drivers are in place at Bidvest Bank: branch banking, global trading and investments and lending and leasing. Both the bank and insurance businesses are highly cash generative and strongly capitalised and well able to pursue both acquisitive and organic growth. Innovation and expansion across the bank branch network are planned while leasing and asset finance teams will continue to expand the corporate lending base. Corporate foreign exchange activities and the payments business are positioned for continued growth. The bank has begun partnering in this area of the business with a global player, Western Union, and expects to build strong momentum. Further expansion of the bank s WCC range is imminent. This product is already positioned as a leader locally. WCC globalisation is now on the cards in association with Visa. Deposit-taking growth has also been targeted. The Bidvest Bank savings-andtransaction account has strong appeal in several segments. Additional opportunities will be pursued through product customisation. New business channels and customerfriendly services are in development, including Bidvest Finance, an innovation to be launched in the first half of 2013 that will enable a client to apply for pre-approved finance online.