Chairman’s Report
Performance
The 2011 financial year was a very successful one for the Letshego Holdings Limited Group. We delivered a strong financial performance and made important steps towards achieving the strategic goals of the Group.
Group-wide advances to customers increased 37% during the year to P2.3 billion. Profits before tax increased 24% to record levels, including the once-off gain on the sale of Legal Guard, but 35% up if the sale is excluded. Headline earnings per share increased 36% if the Legal Guard disposal gain is excluded. At the same time, the business did well to manage costs so the Group’s cost-to-income ratio remains amongst the lowest in the industry at 19%, down from 22% in 2010.
The advances book performed well with impairment charges falling 22% during the period. The impairment charge fell from 3.3% to 1.93% of the average loan book.
Interest margins were generally maintained but may come under pressure going forward, as competition and low interest rates in some of our markets may have an impact. Our cost of funding was maintained at its historically manageable rate. Return on average equity (RoAVE) was still strong at 30%, although this was a decline from last year’s 37.2% (33.1% RoAVE in 2010 after excluding the Legal Guard disposal gain). The balance sheet is strong with low gearing and a debt-to-equity ratio of 29%. We have confirmed key funding lines in place, but this remains an area of focus and our intent is to vigorously pursue further debt funding avenues in the year ahead.
Shareholders also benefited from a 10-for-1 share split undertaken in April 2010 to improve liquidity and the ease of trading of Letshego shares. The desired effect has been achieved, with the Letshego shares’ trade being considerably higher than that enjoyed by other financial institution counters on the Botswana Stock Exchange.
Botswana remains the most significant market for Letshego, at 66.7% of its period-end advances book (2010: 67.4%) and 66% of the Group’s profit before tax (2010: 69%). Operations outside of Botswana continue to gain critical mass and contributed P195 million to Group profit before tax.
Operating Environment
The economies of the countries in which the Group operates improved markedly during the period. Botswana and Namibia saw improved sales in the international diamond market, allowing for the resumption of mining activities and increased employment. Economic growth has recovered, with most markets in which we operate growing at an estimated 4.7% during 2010.
The region continued to make further strides in entrenching democracy with successful elections held in Tanzania and Mozambique during the period, and elections held in Uganda after year end. Elections in Zambia are expected during 2011.
Letshego has been relatively unaffected by recessions in some of our economies as 98% of our customers, at a minimum, are government and civil service employees, which represents a highly stable sector of employment. The recovery of growth has implied that fiscal deficits may start to decline during the current period. The Board and executive management closely monitor sovereign risk and political stability in our countries of operation and neighbouring regions.
In our key markets, some bank lenders showed restraint in consumer and corporate lending with conservative exposure limits in the prevailing subdued environment, providing Letshego with opportunity to gain market share. Our competitive advantage in most markets lies in the successful negotiation and maintenance of employer source deduction agreements. The biggest constraint on the Group is our access to competitive, local currency funding, although we had adequate funds from the equity raised during 2009 and new lines obtained during 2010.
Some of our markets may have to absorb changes to the Southern Africa Customs Union arrangements, which currently provide a significant portion of government revenue in Swaziland and to a lesser extent in Botswana and Namibia. This is a moving target, and we are unsure what the final outcome will be.
Letshego continues to compete strongly in its key markets. We aim to be the preferred lender in our markets by building a brand and reputation for the provision of straightforward loans to qualifying individuals. We can approve a loan within a few hours, and funds are generally disbursed within 48 hours.
We work hard to improve the overall sustainability of the consumer finance industry in our markets, working toward the establishment of central registries and adhering to minimum take-home pay standards. More detail on this is provided in the sustainability section of this report.
Strategy
Letshego will continue to grow good quality loan books in the territories in which it currently operates. During the period, we commenced lending in Mozambique. Indications after financial year-end are very positive, but we will continue to adhere to our phased roll-out plan.
We will only look to enter new countries where it is possible to implement our proven payroll deduction model that ensures our loan books perform well. Countries we have on our radar include Ghana, Lesotho, Nigeria, and Zimbabwe. Other potential markets are Ethiopia, Kenya, Rwanda, and Southern Sudan, which we are constantly evaluating.
Letshego will also look to transform itself into a broader-based financial services organisation over time. We are mindful that the investments we make now in growing our infrastructure must be able to cater for the broader-based organisation we want to become. To facilitate our transformation, we have invested in, and continue to invest in, our IT platform to enable us to move from varying applications across our African footprint into a single integrated, seamless, and robust debtors’ system. We will incorporate the best systems available to facilitate existing business, but ensure they allow for new products and services to be offered.
Human Resources
Letshego now employs almost 600 people across its operations, almost equally split between men and women. The staff complement grew 36% during the period, with growth particularly in Tanzania and Uganda and the staffing of the new operation in Mozambique. We welcome the new employees to the Letshego team and look forward to a long and mutually beneficial relationship.
We also increased our staff complement at middle management levels in the holding company with the introduction of what is evolving into a strong second-in-command layer for our executive management team.
We believe that, overall, these new positions and staff members will help drive attainment of our strategic objectives.
The Group performs regular benchmarking exercises to ensure remuneration policies and practices are in line with best practice.
The Group has a share-based payments scheme, the “Long Term Incentive Plan” (LTIP) in place for key management. The LTIP aligns team members’ goals with the shareholders. Over 20 members of staff have become shareholders in Letshego through the LTIP.
Sustainability
Letshego strives to be a good corporate citizen in the countries in which we operate. We have a Group-wide commitment to sustainability, integrating it from boardroom strategy and product design through to on-the-ground operations.
We spend time and effort cultivating relationships and engaging proactively with our many stakeholders and find ways to address concerns and issues that may arise. Internally, management and the Board continue to interact to improve governance and systems of control within the Group.
The Board also considered and endorsed the King Code of Governance Principles of South Africa 2009 (King III) issued by the Institute of Directors (Southern Africa) and is working towards meeting the revised governance and recommended practices outlined in the code. This is reflected in this annual report, which incorporates many of the recommendations for integrated reporting.
Letshego recognises its social responsibility and partners with the governments in its respective countries of operation to address social ills, particularly for the needy, and to that extent, the Group sets aside 1% of its profit after tax on an annual basis for such purposes. The Group has ploughed back millions into communities across its operations.
During the year, we supported welfare projects focused on young people in Namibia with P412,300; people with disabilities in Tanzania with P504,700; health and youth projects in Botswana with P1,176,000; and a youth and health project in Uganda with P329,500. Letshego Holdings Limited also contributed P709,000 to youth and housing projects. These strengthened our relationships with our stakeholders and allowed our employees to participate in uplifting communities.
We recognise that our business must meet the needs of our customers on a sustainable basis in order to thrive. While Letshego does not actively dictate how our loan products should be utilised, we consciously ensure that amounts lent and the related pricing do not compromise our customers’ take-home pay.
The establishment of independent central registries is central to the Letshego Group’s drive for industry sustainability.
Central registries consolidate all third-party government payroll deductions under one deduction code, which is then sent to government payroll centres. The resultant benefits include ensuring minimum take-home pay rules are adhered to, efficiency, and standardised operating models by lenders. We have been working with regulators in a number of countries to assist in the establishment of such systems as we believe they will contribute to the development of a sustainable industry with a direct bearing on the achievement of our strategic growth objectives.
Changes in Directorship
During the year, Mr. Kofi Jude Bucknor and Mr. Panos Voutyritsas, both representing PAIP-PCAP-FMO Letshego Limited and managed by Kingdom Zephyr Asset Management, resigned from the Board following Kingdom Zephyr’s significant divestment of its holding.
The Board bade farewell to Ms. Alicia Mokone, representing the interests of Botswana Insurance Holdings Limited, as well as Ms. Runa Alam, representing Development Partners International. Board appointments during the year were those of Mr. Idris Mohammed, with Ms. Alam as alternate (representing Development Partners International).
On behalf of my fellow directors, shareholders, and the entire Letshego team, we extend our warm thanks and appreciation to our outgoing directors for their invaluable contributions that have played a significant part in Letshego’s success story.
I am confident that our incumbent Board will continue to propel Letshego to its full and continuously expanding potential in a manner that is responsible and speaks of good governance.
Prospects
The economies in which we operate look set for continued recovery in the year ahead. We will focus on continuing to grow quality loan books in those territories. We believe the year ahead offers good opportunities to maintain growth levels of the recent past.
We will continue to manage impairment levels, in particular by working to insure our loan books against credit and life risks in all territories, which has already started in Swaziland and Namibia.
On the regulatory front, we will work with authorities to introduce central registers and advocate best practices in the industry. We will continue to be guided by the regulatory requirements of our operating environments.
Our efforts to enable regional and business diversification in the strategic period ahead are pivotal to realising our strategic pillars (discussed further in our sustainability report). Prospects for broader-based expansion into financial services look positive at this stage.
Gratitude
Letshego depends on a wide range of stakeholders for its continued success. I am very grateful to our customers, shareholders, strategic partners, and staff for ensuring Letshego goes from strength to strength. Our shareholders and other funders are key to our business model, and I thank them for their support.
We work with many government departments, staff associations, and regulators across our markets, all of whom have been critical to ensuring we operate a successful business model that delivers straightforward, affordable finance in times of need to our customers. My thanks to them all.
I still reiterate that Letshego will continue to be a law-abiding citizen in the respective countries in which we operate.
Thanks also to our Board of Directors, whose guidance has been invaluable to me and the rest of the management team.
CM Lekaukau
Chairman
11 April 2011
