Rising Expenses Push Down CFC Stanbic’s Profits

Apr 13, 2010 (Business Daily/All Africa Global Media via COMTEX) -- CfC Stanbic Holdings Ltd recorded a 46 per cent decline in pre-tax profits last year as rising expenses and a poor showing in its insurance businesses took a toll on the group's overall performance.

The firm recorded Sh709 million in profits before tax compared to Sh1.3 billion the previous year as earnings fell sharply from Sh846 million in 2008 to Sh35.9 million last year.

CfC Stanbic Holdings had issued a profit warning two weeks ago signalling a decline in performance that was linked to a bear stock market and the purchase of a new core banking system last year.

A doubling of impairment losses on equities which the CfC Stanbic's insurance subsidiaries have invested in ate into the firm's revenues in a year that saw a huge dip in stock market performance.

"The financial results were adversely affected by the significant decline in the activity at the Nairobi Stock Exchange (NSE)," read a statement signed by CfC Stanbic Holding's chairman Charles Njonjo.

Impairment losses on equities held by the firm's two insurance firms Heritage Insurance and CfC Life amounted to Sh699 million compared to Sh226 million last year.

In line with developments in other markets, equities turnover at the NSE declined by about 60 per cent with NSE share index closing at 7.8 per cent lower than 2008.

The prolonged bear run at the NSE -one of the few sources of investment income for insurers- took a turn for the worse forcing insurance firms to return to their core business of underwriting risks.

Income from quoted investments listed at the NSE had been the loss mitigating source of revenue for the insurance industry, long faced with mounting underwriting losses amidst increased competition in the sector.

The group's expenses were up 45 per cent from Sh4.7 billion to Sh6.8 billion attributed to costs hinging on branch expansions and the implementation of a new core banking system.

CfC Stanbic's staff costs increased by 27 per cent from Sh1.8 billion in 2008 to Sh2.3 billion last year due to what the firm says is an additional head count for branch expansion and new product support.

Operating expenses were also up by 57 per cent during the year to stand at Sh4.5 billion driven by increased bank branches, new agency offices and one-off costs on the implementation of new banking software.

Integrated financial services models such as those taken by CfC Holdings have increasingly taken root in Kenya with commercial banks leading the way in financial supermarket models.

Equity Bank, NIC Bank and Co-operative Bank are fronting this model, which has come under scrutiny globally in the wake of the financial crisis.

CfC Stanbic is not the only firm feeling the strain of the financial supermarket model.

Of note is Equity Bank which last week closed its investment banking arm barely a year into operations in a grim reminder of the pitfalls of an integrated financial services model.

Reorganisation

Since the merger in 2008 the group has been carrying out a reorganisation exercise to bring together similar entities.

Plans to spin off Heritage and CFC Life by inviting Liberty Insurance of South Africa to take over are expected to aid in writing back higher profits for the holdings company.

By decoupling of the banking and insurance businesses and listing them separately, Standard Bank is making a statement that these businesses are worth more as parts than as a whole when listed on the stock exchange, especially if they are given a sharper management focus.

CfC Stanbic is already reported to be in the process of demerging its insurance unit and listing the new entity as a separate business at the NSE.

To conclude the transfer of the insurance businesses, it is likely Liberty Life will have to buy the minority shares in Heritage Insurance giving the South African insurer full control of CfC Stanbic's Insurance businesses.

Investment products

If concluded, Liberty Life's entry into the Kenyan market will provide Standard Bank Group with an opportunity to drive bancassurance and insurance linked investment products while strengthening the management of its insurance business through Liberty Life.

"We also expect a turnaround for the group after the expected de-merger process," say research analysts from Sterling Investment Bank in a research note. An estimated 80 per cent of the group's business is in banking while the rest are in insurance, financial and investment advisory services.

In 2008 CfC Stanbic's banking business was estimated to have contributed 72 per cent to the firm's profits. The penetration of insurance in Kenya remains remarkably low.

But in an industry where 10 of the largest players control 60 per cent of the market with only 12 insurers recording a premium higher than the industry's average in the last three years, running profitable enterprises has been a challenge.

With too many players engaging in unprofitable rate wars, market players now contend that mergers and acquisitions within the insurance industry could offer a lifeline to the industry.