FBCH 2006 annual report


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FBCH 2006 annual report

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FBCH 2006 annual report

  1. 1. ANNUAL REPORTFBC Holdings Limitedstrength • diversity • service
  2. 2. FBC Holdings Limitedstrength • diversity • service Contents Group Structure 1 Destiny, Cause & Calling 2 General Information 3 Financial Review Summary 5 Chairmans Statement 6 Group Chief Executives Report 9 Directors Report 11 Board of Directors 14 Corporate Governance 16 Auditors Report 28 Financial Statements 29 Shareholders’ Information 74 Notice of AGM 76 Proxy Form 77 ANNUAL REPORT 2006
  3. 3. FBC Holdings Limited strength • diversity • service Group Structure FBC Holdings Limited strength • diversity • service FBC Bank Limited - (100%) (Registered Commercial Bank) The FBC Group is a financial powerhouse whose most valuable FBC Reinsurance Limited - (100%) product is service. We provide you with strong counsel, diversity and innovative thinking. We listen to you, understand your challenges and share in your success. FBC Building Society - (60%) (Registered Building Society) FBC Securities (Private) Limited - (100%)1 ANNUAL REPORT 2006
  4. 4. FBC Holdings Limited strength • diversity • serviceDestiny, Cause & Calling Destiny To be Africa’s trendsetters in financial and risk management. Cause To secure individual and corporate wealth. Calling To create value through a passionate commitment to partnerships. 2 ANNUAL REPORT 2006
  5. 5. FBC Holdings Limited strength • diversity • service General Information REGISTERED OFFICE AUDITORS Old Reserve Bank Building KPMG Chartered Accountants, Zimbabwe 76 Samora Machel Avenue Old Mutual Gardens P O Box 1227, Harare Emerald Hill Zimbabwe P O Box 6, Harare Telephone :263 -04 - 700312/797770 Zimbabwe :263 -04 - 708071/2 Telephone :263 -04 - 302600 Telex :24512 FIRSTB ZW Swift :FBCPZWHA Fax :263 - 04 - 700761 ATTORNEYS E-mail :Marketing@fbc.co.zw Dube Manikai & Hwacha Legal Practitioners Web site :http://www.fbc.co.zw Eastgate Building 6th Floor, Goldbridge, Southwing Cnr S. Nujoma/Robert Mugabe Road P O Box CR 36, Cranborne, Harare TRANSFER SECRETARIES Telephone :263 - 04 - 780351/2 First Transfer Secretaries (Private) Limited 4th Floor, Gold Bridge Costa & Madzonga Legal Practioners Eastgate 4th Floor P O Box 11 Three Anchor House Harare Jason Moyo Telephone :263-04-773744/47 773750/1 Harare Fax :263-04-749048 Telephone : 263-04- 77145/5 Fax : 263-04-737575 FBC Bank Branches Batanai Gardens Branch Belgravia Private Banking Cnr Jason Moyo/1st Street, Mezannine Floor, No. 2 Lanark road, Belgravia, Harare Harare, P O Box BE 818, Belvedere, Harare P O Box A852, Avondale, Harare Telephone :263-04-752929 Telephone :263-04-251975 :263-04-775390 :263-04-251976 Fax :263-04-775395 Fax :263-04-253556 Chinhoyi Branch Gweru Branch Stand 5309 71 - Sixth Street Magamba Way, P O Box 1220 P O Box 1833, Gweru Chinhoyi Telephone :263-054-26491 Telephone :263-067-24086 :263-054-26493/7 Fax :263-067-26162 Fax :263-054-264983 ANNUAL REPORT 2006
  6. 6. FBC Holdings Limited strength • diversity • serviceGeneral Information (cont’d)Jason Moyo Avenue Branch Kwekwe BranchAsbestos House 44a/b Robert Mugabe WayJason Moyo Avenue KwekweP O Box 2910, Bulawayo P O Box 1963, KwekweTelephone :263-09-76079 Telephone :263-055-24116 :263-09-76371 :263-055-24160Fax :263-09-67536 Fax :263-055-24208Masvingo Branch Mutare Branch58/59 Hellet Street 50 B Herbert ChitepoMasvingo P O Box 2797Telephone :263-039-64415/6 MutareFax :263-039-64415/6 Telephone :263-020-62586 :263-020-62114Nelson Mandela Avenue Branch Fax :263-020-60543Nelson Mandela AvenueP O Box BE 818, Belvedere Samora Machel Avenue BranchTelephone :263-04-750946 Old Reserve Bank Building :263-04-753608 76 Samora Machel AvenueFax :263-04-775395 P O Box GD 450, Greendale, Harare Telephone :263-04-700372Southerton Branch :263-04-700044Highfield Junction Shop Fax :263-04-793799P.O. Box St495Southerton Victoria Falls BranchHarare Shop 4 Galleria De FallsTelephone :263-04-759712 P.O Box 225 :263-04-759392 Victoria FallsFax :263-04-759567 Telephone :263-013-45996/5 Fax :263-013-5995/6Zvishavane BranchRobert Mugabe Way FBC ReinsuranceP O Box 91, Zvishavane Head OfficeTelephone :263-051-2176 P O Box 4282, Harare :263-051-2177 6th Floor Fidelity Life TowerFax :263-051-3327 Raleigh Street, Harare Telephone :263-04-772703/7FBC Building Society Head Office Fax :263-04772701P O Box 4041, Harare113 Leopold Takawira Way, Harare FBC ReinsuranceTelephone :263-04-756811/6 Bulawayo OfficeFax :263-04-772743 5th Floor West Wing, Pioneer House14 branches: Harare: Highglen Shopping Centre; Corner Fife/8th AvenueFidelity House; Leopold Takawira; Bulawayo; P O Box 2199ZBS House; 109 Robert Mugabe Way; BulawayoBeitbridge; Chipinge; Gweru; Kadoma; Kwekwe;Marondera; Masvingo; Mutare; Rusape; Zvishavane Telephone :263-09-888344 Fax :263-09-888560FBC Securities (Private) Limited2nd Floor, 99 Jason Moyo Ave.P.O.Box 1227 HarareTelephone : 263 -04 -797782 – 3Fax : 263 -04 -704 758 4ANNUAL REPORT 2006
  7. 7. FBC Holdings Limited strength • diversity • service Financial Review Summary 31 December 2006 Historical 2006 2005 2004 $M $M $M Income Profit before taxation 28 028 868 152 Profit after taxation 20 522 562 95 Balance Sheet Shareholders funds 31 550 778 118 Total assets 92 066 3 218 529 Share Statistics Shares in issue - actual (m) 348 341 340 Shares in issue - weighted (m) 342 337 324 Basic earnings per share - (Z$) 52,16 1,54 0,29 Headline earnings per share - (Z$) 52,46 1,54 0,29 Diluted earnings per share - (Z$) 49,41 1,45 0,27 Dividend per share - Ordinary (Z$) 15,60 0,055 0,015 Share market price - Z$ (31/12/06) 95 2,2 0,026 Ratios Return on shareholders funds 65% 72% 80% Cost income ratio 28% 38% 51% Capital adequacy ratio (Bank) 39% 39% 35%5 ANNUAL REPORT 2006
  8. 8. FBC Holdings Limited strength • diversity • serviceChairmans Statement As widely predicted in the previous year, the economic environment remained extremely challenging, with the Group businesses having to focus on opportunities arising from limited business sources. It is against this background that I am pleased to report that the FBC Group has once again, made significant strides in the year 2006 to consolidate its place in the market. The Group has been particularly adept at making the most out of a fluid trading environment, resulting in all the subsidiaries recording profits and growth well above the rate of inflation. The sustained growth in the performance of the Group over the last few years has put it in a strong position to take advantage of future opportunities as and when a conducive trading environment returns. The real growth is highlighted below bearing in mind the average inflation for the year of 1 033%.Financial Highlights - Historical • Profit before tax up 3 129% to $28 billion from $868 million in 2005. • Profit after tax rose 3 552% to $21 billion from $562million in 2005. • Basic earnings per share attributed to equity holders of the company up 3 287% at $52,16 from $1,54 last year. • Capital adequacy ratios - 39% and 93% at the Bank and Building Society respectively against a prescribed minimum of 10%. • Group cost income ratio improved to 28% from 38% in 2005. • Assets increased by 2 761% to $92 billion from $3 billion last year. • Shareholders’ funds excluding minority interest increased by 3 744% to $27,4 billion. • Proposed dividend of $15,60 per share up from $0,055.We are fully aware and cognisant that the performance and contribution from traditional financial services,loans and overdrafts, mortgages, foreign exchange business, and insurance underwriting continued to beconstrained by a very difficult macro-economic environment. The Group will naturally continue to takeadvantage of available opportunities to ensure sustained growth of income whilst at the same time developingand sustaining the infrastructure for traditional financial services in preparation for the return of a stableeconomic environment.RebrandingThe successful consolidation, repositioning and rebranding of the Group was confirmed by numerousindependent surveys and accolades from the media, including the awarding of the Best Turnaround Trophyfor Zimbabwe Stock Exchange listed companies (co-sponsored by the Premier Group and the FinancialGazette). The Group is well positioned to continue consolidating and enhancing its brand. The flagshipsubsidiary - FBC Bank celebrates its tenth anniversary in 2007, to join FBC Reinsurance and FBC BuildingSociety which have been in existence for more than a decade. The Group will continue focusing on clientservice to augment the brand consolidation. 6 ANNUAL REPORT 2006
  9. 9. FBC Holdings Limited strength • diversity • service Chairmans Statement (cont’d) Hyperinflation The removal of three digits on the currency and the introduction of higher denominated bearer cheques in August 2006 improved transacting convenience in the economy. However, the rate of inflation which had initially slowed down in the month of September in response to the monetary authorities initiatives, picked up again in October peaking at 1 281,1% in December 2006. We are encouraged by the monetary authorities resolve to address the fundamental causes of the current economic malaise. The high rate of inflation has hampered business capacity to plan in advance, to borrow at commercial rates to finance growth and increase productivity. Credit Rating The Bank, Building Society and Reinsurance companies have maintained the investor grade status accorded by an international rating agency. This has boosted our relations with customers, stakeholders and correspondent financial institutions. It is our view, that our credit rating should continue to improve in the future. Regulatory Environment The highly volatile economic environment has translated into a policy regime that is not as predictable as it should be, thereby resulting in severe planning difficulties. The Group companies will continue to ensure compliance with regulatory requirements. In this connection the Bank and the Building Society have always comfortably exceeded the minimal capital requirements set by the authorities over the years. We shall continue to maintain sustainable reserves in our businesses to address any capital requirements that may be set in future. Share Price Performance Whilst our share price traded at a discount for most of the year under review, we are pleased to note that the share trading performance improved significantly during the last quarter of 2006, towards reflecting the true value embedded in the business. Corporate Social Investment The Group was more active in supporting the community in the areas of health, education, sport and charitable organizations around the country. The Group looks forward to a significant increase of its corporate social investment in line with improved performance and growth in 2007 and beyond. The Group firmly believes it has a material role to play in making the environment better through ploughing back profits into the community in different areas of social endeavour. Corporate Headquarters We are pleased to report that the Group will relocate to more spacious headquarters at FBC Centre in the first half of 2007. Other than being a milestone achievement, the new offices will facilitate speedy interaction, consolidate team working and decision-making and focus of the different businesses in a common direction. Directorate Mr Kumbirai Chiimba Katsande resigned from the Board of FBC Holdings Limited with effect from 15 May 2006 due to pressing work commitments. I would like to thank Mr Katsande for his valued contributions to the FBC Group and would like to take this opportunity to wish him well for the future. We were deeply saddened by the untimely passing away in November 2006 of Mr Christopher Gomwe, the well liked founding Managing Director of FBC Reinsurance, who had contributed immensely to the Group before his resignation in September 2006.7 ANNUAL REPORT 2006
  10. 10. FBC Holdings Limited strength • diversity • serviceChairmans Statement (cont’d)DividendIn line with the Groups dividend policy of three times cover, the directors are recommending a finaldividend of $15,60 per share, to be paid by 17 April 2007.OutlookThe trading environment is likely to remain challenging, with the near term being dependent on the 2006/7agricultural season output and the will to resolve the issues indicated by the monetary and fiscal authorities.We are encouraged by the Central Banks new resolve to work with all sectors of the economy to addressthe fundamental causes of our current malaise.AppreciationThe excellent performance of the Group signifies the sustained and focused teamwork of all stakeholdersat FBC. Management and staff have maintained their energetic and collective delivery of stirling resultsas they have done in the past. The guidance and support of non-executive directors deserves special mentionand encouragement. The support of FBC clients across all businesses remains fundamental to the longterm success of the Group and needs to be continually nurtured and rewarded.Herbert NkalaChairmanFBC Holdings Limited14 February 2007. 8ANNUAL REPORT 2006
  11. 11. FBC Holdings Limited strength • diversity • service Group Chief Executive’s Report Group Chief Executives Review I am pleased to report on another successful year of performance by the FBC Group. Our businesses took appropriate measures to adapt to the new challenges and environment to post very good results, by any standards, for the year ended December 2006. The success of the FBC Group is underpinned by committed and competent staff and the enabling and supportive environment created by a professional and well balanced Board of Directors. The FBC brand has made its mark on the Zimbabwe financial services market, a position that is confirmed by favourable outcomes from independent survey groups and awards from the media. Operations Review FBC Bank As the flagship business of the Group, the Bank continued on a sustained path of strong profitability that has remained consistently above the rate of inflation. The business has stood its ground and significantly narrowed the gap between FBC Bank and leading mainstream competitors. The strengthening brand has created opportunities for the corporate banking segment of the Bank, which has grown its market in this sector. The business will in the ensuing year seek to broaden convenience value and service delivery in a manner that positively impacts the cost income ratio. There is currently no merit for expansion of the distribution network but the need to move towards consolidation with a view to improving vertical consumption of the banks offering as well as appealing to new market segments. The authorities monetary policy direction will continue to have a huge impact on the trading strategies of the Bank. FBC Building Society The Society contributed 24% in profit before tax, compared to a contribution of 13% last year. The growth in the Societys surplus, bears testimony to the fact that it is now well positioned to effectively compete with other more established competitors. I am pleased to advise that the Society was accorded an investment grade rating by an international rating agency Global Credit Rating. Whilst all FBC businesses are internationally rated, this development is an independent confirmation of the successful turnaround of the Society. The Society, in the near term, will seek to consolidate through structured mortgage facilities, and set itself as a clear leader in that segment. The move should see the Society reduce the gap with competitors in the sector, while leveraging retail business through a stronger brand. The Society is set to unlock the opportunities in middle income segments through repositioning in those segments. FBC Reinsurance Limited FBC Res capital base was significantly boosted in September 2006 through fresh liquid capital injection by FBC Holdings. This enhanced FBC Res underwriting capacity ahead of the 2007 treaty renewal. Furthermore FBC Res highly liquid balance sheet allows it to improve on its service delivery and provide stronger security to its clientele. Foreign exchange denominated business risk is significantly high and FBC Re will cautiously trade -off to ensure viability of such underwriting. The business will as always endeavour to sustain profitable relationships that have delivered value and have been proven over time. FBC Securities The stockbroking business FBC Securities has held its own, taking advantage of the more or less predictable flow of funds between the money and stock market. Activity on the stock market is expected to continue increasing and FBC Securities will seek to increase its share of the increase in transactions.9 ANNUAL REPORT 2006
  12. 12. FBC Holdings Limited strength • diversity • serviceGroup Chief Executive’s Report (cont’d)StrategyThe Group will implement a grow-and-consolidate strategy in the local market. The macroeconomicenvironment and policy direction will remain key determinants of the Groups thrust. The Group remainskeen to look at businesses that can be leveraged of value at acceptable risk.Electronic CommerceThe Group is seeking to take advantage of electronic platforms for the delivery of service to clients andmarkets. FBC Bank has implemented e-delivery channels which should avail numerous options for clientsto transact at a time and place of their choosing. This should in the medium to long term reduce servicedelivery costs whilst extending convenience. The deployment of such solutions will pervade all the businessesas it has a material impact on overall cost of delivery and market development.Cost Income RatioThe aggregate cost income ratio of the Group has improved significantly to 28% from 38%. The Groupwill continue to pursue operational strategies that ensure this index continues to improve.People and Organisational Development People are the greatest asset of FBC, and their development ensures maximum return on the rest of thebusiness capital. FBC is an equal opportunity employer and invests in staff development and training aswell as rewarding good performance. In 2004 the Group embarked on integration programmes that soughtto gel the Group and optimize the synergy benefits. The first group of Management and Leadershipdevelopment programme graduands completed their studies in 2006. The Group will continue to exploreand implement continuous improvement programmes to maintain our cutting edge status.Service DeliveryService delivery remains one of the Groups biggest customer value delivery priorities in the near term. Itis the Groups belief that the brand will be strengthened on a solid and consistent service reputation acrossall businesses.Risk ManagementThe Group continued to reinforce its risk management systems to better manage the varied risks posedby diversified businesses. The Group put in place a compliance management structure which independentlybut closely monitors key policy issues which have a material bearing on the organisations risk profile. TheGroup is currently well positioned to take and manage more diversified risks that add value to our businesses.AppreciationI wish to express my appreciation to the FBC Team comprising the Board of Directors, Management andStaff for their continued support and a job well done. My sincere gratitude extends to our customers andstakeholders who have demonstrated their well placed confidence in us over the years and we look forwardto welcoming new customers and stakeholders in the year 2007 and beyond.Livingstone T. GwataGroup Chief Executive14 February 2007. 10 ANNUAL REPORT 2006
  13. 13. FBC Holdings Limited strength • diversity • service Directors Report 31 December 2006 Historical Your directors have pleasure in submitting their third annual report and accounts, for the financial year ended 31 December 2006, for FBC Holdings Limited. 1. ACTIVITIES AND INCORPORATION The Company is incorporated in Zimbabwe and is an investment holding company. The Group comprises of three wholly-owned subsidiaries and one 60% controlled subsidiary. The Group through its subsidiaries provide a wide range of commercial banking, mortgage finance related financial services, stockbroking and reinsurance services. 2. AUTHORISED AND ISSUED SHARE CAPITAL The authorised share capital of the Company was $800 000, divided into 800 000 000 ordinary shares of 0,1 cents each as at 31 December 2006. The issued and fully paid shares were $348 001,78 made up of 348 001 777 ordinary shares of 0,1 cents each. 3. RESERVES The Groups total shareholders funds attributable to equity holders of the company as at 31 December 2006 was $27 409 000 000. Further details of the movement in reserves are shown on the statement of changes in equity. 4. ACCOUNTS 2006 $M The results reflected a profit before taxation for the year of 28 028 Taxation 7 506 Profit after taxation 20 522 Attributable to: Equity holders of the company 17 838 Minority interest 2 684 20 52211 ANNUAL REPORT 2006
  14. 14. FBC Holdings Limited strength • diversity • serviceDirectors Report (cont’d)31 December 20065. DIRECTORS INTERESTS As at 31 December 2006, the Directors interest in the issued shares of the company directly or indirectly are shown below: Directors shareholding Director Direct Shareholding Indirect Shareholding L. T. Gwata (Group Chief Executive) 3 843 120 9 584 034 W. Rusere (Executive Director) 100 000 - T. Kufazvinei (Executive Director) 360 844 3 408 956 J. Mushayavanhu (Executive Director) 1 655 944 9 233 098 G. G. Nhemachena (Non Executive Director) 1 020 - S. Kudenga (Executive Director) 100 000 - 6 060 928 22 226 088 The other directors have no shareholding in the company.6. DIRECTORATE Details of Directors are reflected on pages 14 to 15. The following appointment was made during the year ended 31 December 2006. Mr Stanley Kudenga was appointed to the Board on 1 October 2006 as an Executive Director. The appointment will be confirmed at the Annual General meeting on 21 June 2007. Messrs Kumbirayi Chiimba Katsande and the late Christopher Matarirano Gomwe resigned from the Board of Directors on 15 May 2006 and 30 September 2006 respectively. I would like to thank them for their valued contribution. In accordance with the Articles of Association Mr Herbert Nkala and Mr Godfrey Gaviro Nhemachena retire from the Board by rotation and being eligible offer themselves for re-election.7. CAPITAL ADEQUACY At 31 December 2006, the Bank subsidiary capital adequacy ratio computed under the Reserve Bank of Zimbabwe rules was 39%, and that of FBC Building Society was 93%.8. DIVIDEND ANNOUNCEMENT The Board on 14 February 2007, proposed a final dividend of $15,60 per share on 348 001 777 shares. The dividend is payable to shareholders registered in the books of the company on 30th March 2007. The transfer books and register of members will be closed from 31st March 2007 to the 10th April 2007. Dividend cheques will be posted to shareholders on or about the 17th of April 2007. 12ANNUAL REPORT 2006
  15. 15. FBC Holdings Limited strength • diversity • service Directors Report (cont’d) 31 December 2006 9 DIRECTORS RESPONSIBILITY STATEMENT The Directors are responsible for the preparation and the integrity of the financial statements that fairly present the state of the affairs of the Group at the end of the financial year and the income statement account and cash flow for that period and other information contained in this report. The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRSs) and interpretations adopted by the International Accounting Standards Board (IASB), and the requirements of the Companies Act (Chapter 24:03) and the Banking Act (Chapter 24:20), Insurance Act (Chapter 24:07), Zimbabwe Stock Exchange Act (Chapter 24:18) and the Building Societies Act (Chapter 24:02). To enable the Directors to meet the above requirements, the Directors are responsible for maintaining adequate accounting records and internal controls to safeguard the assets of the Group and to prevent and detect fraudulent activities. The Directors are of the opinion that the Group will be a going concern in the year ahead. Accordingly, the financial statements continue to be prepared on a going concern basis. The financial statements which appear on pages 29 to 73 were approved by the Board on 14 February 2007. 10. AUDITORS Messrs. KPMG have expressed their willingness to continue in office and shareholders will be asked to confirm their re-appointment at the forthcoming Annual General Meeting and to fix their remuneration for the past year. By order of the Board Tichaona K. Mabeza Secretary 14 February 200713 ANNUAL REPORT 2006
  16. 16. FBC Holdings Limited strength • diversity • serviceBoard of Directors31 December 2006HERBERT NKALA, B.Sc. Hons, MBA(CHAIRMAN)Appointed to the Board of Directors of First Banking Corporation Ltd in February 1997. He is the Chairmanand director of several other companies, which are listed on the Zimbabwe Stock Exchange.LIVINGSTONE TAKUDZWA GWATA - B. Admin. CAIB, FIBZ(GROUP CHIEF EXECUTIVE)Appointed to the Board of First Banking Corporation Ltd in July 1998 as Managing Director. AppointedGroup Chief Executive in August 2004. He is a director of several companies. He is also a past Chairmanand President of the Institute of Bankers of Zimbabwe.KENZIAS CHIBOTA - B.Acc(Hons), CA(Z)(NON-EXECUTIVE DIRECTOR)Appointed to the Board of FBC Holdings Ltd in August 2004. He is the Chief Executive Officer of DestinyElectronics (Private) Limited and director of several other companies.PHILLIP MHARIDZO CHIRADZA (MSC - Strategic Management), Dip (Gen Management)(NON -EXECUTIVE DIRECTOR)Appointed to the Board of Directors of FBC Holdings Ltd in June 2005. He is the former Managing Directorof Beverley Building Society and is a director of several other companies.STANLEY KUDENGA - B.Acc(Hons), CA(Z) MBL(EXECUTIVE DIRECTOR)Appointed to the Board of Directors of First Banking Corporation Ltd in June 2002 as Executive Director,Investment Banking. He is the Managing Director of FBC Reinsurance Company Limited.TRYNOS KUFAZVINEI - B.Acc(Hons), CA(Z), MBA(GROUP FINANCE DIRECTOR)Appointed to the Board of First Banking Corporation Ltd in October 2003 and was appointed GroupFinance Director in August 2004. He is responsible for the financial and administration matters of theGroup. He has over 15 years experience in finance and administration.SHINGIRAI ALBERT MUNYEZA - B.Compt, Dip Applied Accountancy, IMM(NON- EXECUTIVE DIRECTOR)Appointed to the Board in June 2004 and is the Vice Chairman of the Board of Directors of FBC HoldingsLtd, Mr Munyeza is the Group Chief Executive of Zimbabwe Sun Limited and a director of several othercompanies.JOHN MUSHAYAVANHU - AIBZ, Dip Management, MBA(EXECUTIVE DIRECTOR)Appointed to the Board of Directors of First Banking Corporation Ltd in October 1997 and was appointedManaging Director of FBC Bank Ltd in August 2004. Appointed to the Board of FBC Holdings Ltd inAugust 2004. He is a director of several companies. 14ANNUAL REPORT 2006
  17. 17. FBC Holdings Limited strength • diversity • service Board of Directors (cont’d) 31 December 2006 JOHNSON REX MAWERE (NON-EXECUTIVE DIRECTOR) Appointed to the Board of FBC Holdings Ltd in August 2004. He is the former Mayor of the City of Kwekwe and is a director of several other companies. GODFREY GAVIRO NHEMACHENA - BSc. Soc (NON-EXECUTIVE DIRECTOR) Appointed to the Board of Directors of First Banking Corporation Ltd in June 2002. He holds directorships in a number of other companies. He is the former Town Clerk for the City of Gweru and is the Chairman of the Local Authorities Pension Fund. MS NANCY SAUNGWEME (NON-EXECUTIVE DIRECTOR) Appointed to the Board of FBC Holdings Ltd in July 2005. She is an entrepreneur and a former diplomat. WEBSTER RUSERE (AIBZ, MBA) (EXECUTIVE DIRECTOR) Appointed to the Board of Directors of FBC Holdings Ltd in June 2005. He is the Managing Director of FBC Building Society. He is a career banker and has worked for a number of financial institutions.15 ANNUAL REPORT 2006
  18. 18. FBC Holdings Limited strength • diversity • serviceCorporate Governance31 December 2006THE BOARDFBC Holdings Board is committed to the principles of openness, integrity and accountability. It recognisesthe developing nature of corporate governance and assesses its compliance with local and internationalgenerally accepted corporate governance practices on an ongoing basis through its various subcommittees.Guidelines issued by the Reserve Bank of Zimbabwe from time to time are strictly adhered to and compliancecheck lists are continuously reviewed.The Board of Directors comprises of five executive directors and seven non-executive directors. Thecomposition of the Board of FBC Holdings Limited shows a good mix of skill, experience as well as successionplanning. The Group derives tremendous benefit from the diverse level of skills and experience of its Boardof Directors.The Board is responsible to the shareholders for setting the direction of the Group through the establishmentof strategies, objectives and key policies. The Board monitors the implementation of these policies througha structured approach to reporting and accountability.BOARD ATTENDANCE Name Quarter 1 Quarter 2 Quarter 3 Quarter 4 Herbert Nkala Livingstone T. Gwata Kenzia Chibota Philip M. Chiradza Stanley Kudenga N/A N/A N/A Trynos Kufazvinei Singira A. Munyeza John Mushayavanhu Johnson R. Mawere Godfrey G. Nhemachena Nancy Saungweme Webster Rusere Key: Attended Apologies N/A Not applicableThe Board meets regularly, with a minimum of four scheduled meetings annually. To assist the Board inthe discharge of its responsibilities a number of committees have been established, of which the followingare the most significant:BOARD FINANCE AND STRATEGY COMMITTEEK. Chibota (Chairman)P.M. ChiradzaL.T. GwataS. KudengaT. KufazvineiJ. MushayavanhuW. RusereN. SaungwemeThe Board Finance Committee has written terms of reference. It is chaired by a non-executive director.Meetings of the Committee are attended by invitation, by other senior executives. This committee isconstituted at Group level and overseas the subsidiary companies.The committee meets at least four times a year to review the following:• The Groups performance against agreed benchmarks,• The Groups Strategy and budget,• The Groups financial statements, and accounting policies,• The adequacy of the Groups management information systems. 16ANNUAL REPORT 2006
  19. 19. FBC Holdings Limited strength • diversity • service Corporate Governance (cont’d) 31 December 2006 BOARD HUMAN RESOURCES AND REMUNERATION COMMITTEE H. Nkala (Chairman) L.T. Gwata P.M. Chiradza S.A. Munyeza The committee is chaired by a non-executive director and comprises mainly of non-executive directors except for the Group Chief Executive of FBC Holdings. Meetings of the committee are attended by invitation, by the Divisional Director of Human Resources and the subsidiary managing directors. This committee is constituted at Group level and overseas the subsidiary companies. The committees primary objective is to ensure that the right calibre of management is attracted and retained. To achieve this it ensures that the Directors, Senior Managers and other staff are appropriately rewarded for their contributions to the Groups performance. The committee is also responsible for the Groups Human Resources Policy issues, terms and conditions of service. Non-Executive Directors are remunerated by fees and do not participate in any performance-related scheme. BOARD CREDIT COMMITTEE G. Bera (Chairman) B.N. Kumalo L.T. Gwata S.M. Mutangadura J. Mushayavanhu This committee falls directly under the Bank. It sets the Banks Credit Policy and also approves credit applications above Managements authorised limits. The committee is responsible for the overall quality of the Banks credit portfolio. The committee is chaired by a non-executive director. The Divisional Director of Credit and Risk Management attends the committee meetings by invitation. BOARD LOANS REVIEW COMMITTEE S.A. Munyeza (Chairman) D. Birch P.F. Chimedza The committee falls directly under the Bank, has terms of reference and comprises non-executive directors only. Meetings of the committee are attended by invitation, by the Managing Director of the Bank, the Divisional Director of Credit and Risk Management and the Group Chief Executive. The committee is responsible for ensuring that the Banks loan portfolio and lending abide by the approved credit policy as approved by the Board of Directors and is in compliance with RBZ requirements. It also ensures that problem loans are properly identified, classified and placed on non-accrual in accordance with the Reserve Bank guidelines. The committee also ensures that adequate provisions are made for potential losses and write-offs of losses identified are made in the correct period.17 ANNUAL REPORT 2006
  20. 20. FBC Holdings Limited strength • diversity • serviceCorporate Governance (cont’d)31 December 2006BOARD AUDIT COMMITTEES. Munyeza (Chairman)J.R. MawereG.G. NhemachenaN. SaungwemeThe committee is chaired by a non-executive director and comprises of non-executive directors only. TheGroup Chief Executive, Divisional Director of Internal Audit, the Managing Directors of the subsidiaries,the Group Finance Director attend the committee by invitation. The committee is constituted at Grouplevel and overseas subsidiary companies.The committee meets regularly to: • Review compliance with statutory regulations • Review the effectiveness of internal controls • Review and approve the audited annual financial statements • Review reports of both internal and external auditors findings, instituting special investigations where necessary.BOARD RISK AND COMPLIANCE COMMITTEEG. G. Nhemachena (Chairman)K. ChibotaP. M. ChiradzaL.T. GwataJ. MushayavanhuW. RusereThe committee is constituted at group level and is responsible for the Group Risk Management function.It is chaired by a non executive director. 18 ANNUAL REPORT 2006
  21. 21. FBC Holdings Limited strength • diversity • service Corporate Governance (cont’d) 31 December 2006 BOARD ASSET AND LIABILITY COMMITTEE B.N. Kumalo (Chairman ) G.T. Bera D.W. Birch L.T. Gwata J. Mushayavanhu S.M. Mutangadura The committee falls directly under the bank and is chaired by a non executive director. It is responsible for the continuous monitoring of the banks assets and liabilities. INTERNAL FINANCIAL CONTROLS The Directors are responsible for the Groups internal control system, which incorporates procedures that have been designed to provide reasonable assurance that assets are safeguarded, proper accounting records are maintained and financial information is reliably reported. The key procedures which the Board considers essential to provide effective control include: i) Decentralized organisation structure with strong management working within defined limits of responsibility and authority. ii) An annual budgeting process with quarterly re-forecasts to reflect changing circumstances, and the identification of key risks and opportunities. iii) Detailed monthly management accounts with comparisons against budget through a comprehensive variance analysis. Nothing has come to the attention of the directors to indicate that any material breakdown in the functioning of these internal control procedures and systems has occurred during the year under review. EXECUTIVE COMMITTEE The operational management of the Group is delegated to the executive committee, which is chaired by the Group Chief Executive. The committee comprises: The Group Chief Executive Managing Director (FBC Bank Limited) Managing Director (FBC Reinsurance) Managing Director (FBC Building Society) Managing Director (FBC Securities) Group Finance Director Group Company Secretary It meets fortnightly or more frequently if necessary and acts on behalf of the Board. INTERNAL AUDIT The internal audit department examines and evaluates the companys activities with the aim of assisting management with the effective discharge of their responsibilities. It reviews the reliability and integrity of financial and operating information, the systems of internal control, the efficient management of the Groups resources, the conduct of operations and the means of safeguarding assets. The Divisional Director of Internal Audit reports to the Chairman of the Audit Committee.19 ANNUAL REPORT 2006
  22. 22. FBC Holdings Limited strength • diversity • serviceCorporate Governance (cont’d)31 December 2006RISK MANAGEMENT AND CONTROL(a) Introduction and overviewManaging risk effectively in a diverse and complex financial institution such as FBC Holdings Group requiresa comprehensive risk management governance structure that promotes the following elements of a soundrisk management framework: • Sound Board and Senior Management oversight. • Adequate policies, procedures and limits. • Adequate risk monitoring and management information systems (MIS). • Adequate internal controls.FBC Holdings manages risk through a comprehensive framework of risk principles, organizational structureand risk processes that are closely aligned with the activities of the four entities under the Group.The most important risks that the Group is exposed to are listed below: • Reputational risk • Strategic Risk • Credit risk • Liquidity risk • Market risk • Operational risk • Compliance riskIn addition to the above, there are also specific business risks that arise from the Groups ReinsuranceCompanys core activities.Risk management frameworkIn line with the Groups risk strategy, size and complexity of its activities, the Board established a riskgovernance structure and responsibilities that are adequate to meet the requirements of a sound riskmanagement framework.The Groups Board of Directors has the ultimate responsibility for ensuring that an adequate and effectivesystem of internal controls are established and maintained. The Board delegates its responsibilities to thefollowing Management Committees through its respective Board Committees: • Group Risk and Compliance Committee • Group Audit Committee • Group Human Resources and Remuneration Committee • Group Finance and Strategy Committee • Credit Committees for the Bank and Building Society • Loans Review Committee for the Bank and Building Society • Risk and Investment Committee for the Securities Company • Assets Liabilities Committees (ALCO) for the Bank and Building Society 20 ANNUAL REPORT 2006
  23. 23. FBC Holdings Limited strength • diversity • service Corporate Governance (cont’d) 31 December 2006 RISK MANAGEMENT AND CONTROL (cont’d) The specific duties delegated to each committee of the Board and its respective Management Committee are outlined in the terms of reference for the specific committees. In addition to the above committees, the following three risk related functions are directly involved in Group-wide risk management: • Group Credit and Risk Management function • Group Internal Audit • Group Compliance Group Credit and Risk Management Division assumes a central role in oversight of, and management of all risks that the Group is exposed to in its various activities. The Divisional Director, Group Credit and Risk Management is responsible for setting a framework that ensures the effective management and alignment of credit risk within the Group. The Group Risk Manager who reports to the Divisional Director, is responsible for the process of identifying, quantifying, communicating, mitigating, monitoring, and planning for effective risk management. Group compliance is an independent core risk management activity that is headed by the Group Compliance Officer who reports administratively to the Group Chief Executive and directly to the Group Risk and Compliance Committee. The Group Compliance Officer has unrestricted access to the Chairman of the Board. Group Internal Audit independently audits the adequacy and effectiveness of the Groups risk management, control and governance processes. The Divisional Director, Group Internal Audit who reports administratively the Group Chief Executive provides independent assurance to the Group Audit Committee and has unrestricted access to the Chairman of the Board. (b) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Groups loans and advances to customers and other banks and investment securities. For risk management reporting purposes, the Group considers and consolidates all elements of credit risk exposure (such as individual obligor default risk and sector risk). For risk management purposes, credit risk arising on trading securities is managed independently, but reported as a component of market risk exposure.21 ANNUAL REPORT 2006
  24. 24. FBC Holdings Limited strength • diversity • serviceCorporate Governance (cont’d)31 December 2006RISK MANAGEMENT AND CONTROL (cont’d)Management of credit riskThe Board of Directors has delegated responsibility for the management of credit risk to its Board CreditCommittee. An independent Group Credit and Risk Management Division is responsible for oversight ofthe Groups credit risk, including: • Formulating credit policies in consultation with business units, covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements. • Establishing the authorisation structure for the approval and renewal of credit facilities. All credit facilities require the approval of either the Board Credit Committee, Management Credit Committee or Group Credit and Risk Management depending on the level of the facility. • Reviewing and assessing credit risk. Group Credit and Risk Management assesses all credit exposures prior to facilities being committed to customers by the business unit concerned. Any renewal of facilities is subject to the same review process. • Limiting concentrations of exposure to counterparties, geographies and industries (for loans and advances), and by issuer, credit rating band and market liquidity and country (for investment securities). • Developing and maintaining the Groups risk grades in order to categorise exposures according to the degree of risk of financial loss faced and to focus management on the attendant risks. The risk grading system is used in determining where impairment provisions may be required against specific credit exposures. The Group uses the Reserve Bank of Zimbabwe risk grading framework which consists of five grades reflecting varying degrees of risk of default and the availability of collateral or other credit risk mitigation. The responsibility for setting risk grades lies with the responsible business unit managers in conjunction with Group Credit and Risk Management who carry out regular reviews. • Reviewing compliance of business units with agreed exposure limits, including those for selected industries and product types. Regular reports are provided to Group Credit and Risk Management on the credit quality of local portfolios and appropriate corrective action is taken. • Providing advice, guidance and specialist skills to business units to promote best practice throughout the Group in the management of credit risk.Each business entity is required to implement Group credit policies and procedures and is also responsiblefor the quality and performance of its credit portfolio as well as monitoring and controlling all credit risksin its portfolios.Regular audits of business entities and Group Credit processes are undertaken by Group Internal Audit.Impaired loans and securitiesImpaired loans and securities are loans and securities for which the Group determines that it is probablethat it will be unable to collect all principal and interest due according to the contractual terms of theloan/securities agreement(s). These loans are graded C to E in the Groups internal credit risk gradingsystem.Past due but not impaired loansLoans and securities where contractual interest or principal payments are past due but the Group believesthat impairment is not appropriate on the basis of the level of security/collateral available and/or the stageof collection of amounts owed to the Group.Loans with renegotiated termsLoans with renegotiated terms are loans that have been restructured due to deterioration in the borrowersfinancial position and where the Group has made concessions that it would not otherwise consider. Oncethe loan is restructured it remains in this category independent of satisfactory performance after restructuring. 22 ANNUAL REPORT 2006
  25. 25. FBC Holdings Limited strength • diversity • service Corporate Governance (cont’d) 31 December 2006 RISK MANAGEMENT AND CONTROL (cont’d) (b) Credit risk (Contd) Allowances for impairment The Group establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loan loss allowance established for groups of homogeneous assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment for impairment. Write-off policy The Group writes off a loan/security balance (and any related allowances for impairment losses) when Group Credit determines that the loans/securities are uncollectible. This determination is reached after considering information such as the occurrence of significant changes in the borrower/issuers financial position such that the borrower/issuer can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure. For smaller balance standardised loans, charge off decisions generally are based on a product specific past due status. The Group holds collateral against loans and advances to customers in the form of mortgage interest over property, other registered securities over assets, and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and generally are not updated except when a loan is individually assessed as impaired. Collateral generally is not held over loans and advances to banks, except when securities are held as part of reverse repurchase and securities borrowing activity. Collateral usually is not held against investment securities, and no such collateral was held as at period end. (c) Settlement risk The Groups activities may give rise to risk at the time of settlement of transactions and trades. Settlement risk is the risk of loss due to the failure of a company to honour its obligations to deliver cash, securities or other assets as contractually agreed. For certain types of transactions the Group mitigates this risk by conducting settlements through a settlement/clearing agent to ensure that a trade is settled only when both parties have fulfilled their contractual settlement obligations. Settlement limits form part of the credit approval/limit monitoring process described earlier. Acceptance of settlement risk on free settlement trades requires transaction specific or counterparty specific approvals from Group Risk. (d) Liquidity risk Liquidity risk is the risk that the Group has insufficient funds or marketable assets available to fulfil its maturing obligation to a counterparty. Liquidity risk can result from mismatches between maturing assets and liabilities within the Groups business entities and from an obligators failure to meet a maturing commitment. The management of liquidity risk for FBC Bank and FBC Building Society has been delegated by the Board to the FBC Bank Management ALCO and FBC Building Society Management ALCO respectively. Both Committees have the mandate to ensure adequate cash flow management. FBC Securities manages liquidity risk through the Risk and Investment Committee. The Reinsurance Company manages this risk through its Management Committee. In addition to the above, the day to day managing of liquidity risk is the responsibility of the respective Heads of Treasury divisions within the Groups entities, with Group Risk Management providing independent checks.23 ANNUAL REPORT 2006
  26. 26. FBC Holdings Limited strength • diversity • serviceCorporate Governance (cont’d)31 December 2006RISK MANAGEMENT AND CONTROL (cont’d)Management of liquidity riskThe Groups approach to managing liquidity is to ensure, as far as possible, that it will always have sufficientliquidity to meet its liabilities when due, under both normal and stressed conditions, without incurringunacceptable losses or risking damage to the Groups reputation.When an operating subsidiary is subject to a liquidity limit imposed by its local regulator, the subsidiaryis responsible for managing its overall liquidity within the regulatory limit in co-ordination with therespective Management Committee such as the Assets Liability Committee. Group Credit and RiskManagement monitors compliance of all operating subsidiaries with local regulatory limits on a daily basis.The daily liquidity position is monitored and regular liquidity stress testing is conducted under a varietyof scenarios covering both normal and more severe market conditions. All liquidity policies and proceduresare subject to annual reviews and approvals by the respective entities Asset Liabilities Committees.Contingency liquidity plans are also reviewed in line with the prevailing operating environment.Exposure to liquidity riskThe key measure used by the Group for managing liquidity risk is the ratio of net liquid assets to depositsfrom customers. For this purpose net liquid assets are considered as including cash and cash equivalentsand investment grade debt securities for which there is an active and liquid market less any deposits frombanks, debt securities issued, other borrowings and commitments maturing within the next month. Asimilar, but not identical, calculation is used to measure the Groups compliance with the liquidity limitestablished by the Groups lead regulator, the Reserve Bank of Zimbabwe.(e) Market risksMarket risk is the risk that changes in market prices, such as interest rate, equity prices, foreign exchangerates and credit spreads (not relating to changes in the obligors/issuers credit standing) will affect theGroups income or the value of its holdings of financial instruments. The objective of market risk managementis to manage and control market risk exposures within acceptable parameters, while optimising the returnon risk.Management of market risksThe Group separates its exposure to market risk between trading and non-trading portfolios. Tradingportifolio include positions arising from market making and proprietary position taking, together withfinancial assets and liabilities that are managed on a fair value basis.All foreign exchange risk within the Group is managed by the Banks Treasury unit. Accordingly, the foreignexchange position is treated as part of the Groups trading portfolios for risk management purposes.Overall authority for market risk is vested in ALCO. Group Risk is responsible for the development ofdetailed risk management policies (subject to review and approval by ALCO) and for the day-to-day reviewof their implementation. The entities treasury functions are responsible for the day to day managementof market risks. 24 ANNUAL REPORT 2006
  27. 27. FBC Holdings Limited strength • diversity • service Corporate Governance (cont’d) 31 December 2006 RISK MANAGEMENT AND CONTROL (cont’d) Exposure to interest rate risk - non-trading portfolios The principal risk to which non-trading portfolios are exposed to is the risk of loss from fluctuations in the future cash flows or fair values of financial instrument because of a change in market interest rates. Interest rate risk is managed principally through monitoring interest rate gaps and by having pre-approved limits for repricing bands. The ALCO is the monitoring body for compliance with these limits and is assisted by Group Risk Management in its day-to-day monitoring activities. The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Groups financial assets and liabilities to various standard and non-standard interest rate scenarios. Standard scenarios that are considered on a monthly basis include a 100% fall or rise in all yield curves countrywide and a 50% rise or fall in the greater than 12-month portion of all yield curves. Overall non-trading interest rate risk positions are managed by respective subsidiary treasury departments, which use investment securities, advances to banks and deposits from banks to manage the overall position arising from the Groups non-trading activities. Exposure to other market risks - non-trading portfolios Credit spread risk (not relating to changes in the obligor/issuers credit standing) on debt securities held by respective treasury departments and equity price risk is subject to regular monitoring by Group Risk, but is not currently significant in relation to the overall results and financial position of the Group. (f) Operational risks Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events whether deliberate, accidental or natural. It includes potential risk from fraud or errors, processing disruptions, control breaches or failure and information weakness. Operational risks arise from all of the Groups operations and are faced by all business entities. The ultimate responsibility for operational risk management rests with the Groups Board of Directors which manages operational risks through Board Risk and Compliance Committees. Group Risk Management which reports to Management Group Risk and Compliance Committee through the Divisional Director, Group Credit and Risk Management is responsible for operational risk identification, measuring, monitoring and control in liaison with the business units. The Groups Board and Senior Management realize the need to establish a sound and effective system to manage operational risk as a distinct class of risk and have therefore adopted an operational risk management framework consisting of the following components: • Board and senior management oversight; • Operational risk management strategy, policies and procedures; • Sound internal controls and reviews; and • Adequate management information systems. Group Risk Management is responsible for ensuring that all the Group entities implement the Group Operational Risk Policy. Group Internal Audit provides quality assurance through periodic reviews in addition to the following operational risk assessments conducted by Group Risk Management: • Self Risk Assessments • On Site Risk Assessments • Offsite or Report Based Risk Assessments Operational risk is controlled and mitigated through comprehensive, ongoing risk management practices which include formal internal control procedures, training, segregation of duties, delegated authorities and contingency planning.25 ANNUAL REPORT 2006
  28. 28. FBC Holdings Limited strength • diversity • serviceCorporate Governance (cont’d)31 December 2006RISK MANAGEMENT AND CONTROL (cont’d)Each of the Groups entities has policies and procedures that govern their operations as is documented inthe respective policy and procedure manuals. The policies and procedures clearly delineate accountabilityand lines of authority across the Group.(g) Capital managementRegulatory capitalRegulatory authorities set and monitor capital requirements for the Group as a whole. The parent companyand individual banking operations are directly supervised by the Reserve Bank of Zimbabwe (RBZ).In implementing current capital requirements the RBZ requires the Group to maintain a prescribed ratioof total capital to total risk-weighted assets.The Groups regulatory capital is analysed into two tiers: • Tier 1 capital, which includes ordinary share capital, share premium, retained earnings, and minority interests after deductions for goodwill and intangible assets, and other regulatory adjustments relating to items that are included in equity but are treated differently for capital adequacy purposes. • Tier 2 capital, which includes qualifying subordinated liabilities, collective impairment allowances and the element of the fair value reserve relating to unrealised gains on equity instruments classified as available-for-sale.Various limits are applied to elements of the capital base. Qualifying tier 2 capital cannot exceed tier 1capital; and qualifying term subordinated loan capital may not exceed 50 percent of tier 1 capital.Banking operations are categorised as either trading book or banking book, and risk-weighted assets aredetermined according to specified requirements that seek to reflect the varying levels of risk attached toassets and off-balance sheet exposures.The Groups policy is to maintain a strong capital base so as to maintain investor, creditor and marketconfidence and to sustain future development of the business. The impact of the level of capital onshareholders return is also recognised and the Group recognises the need to maintain a balance betweenthe higher returns that might be possible with greater gearing and the advantages and security affordedby a sound capital position.The Group and its individually regulated operations have complied with all externally imposed capitalrequirements throughout the period.There have been no material changes in the Groups management of capital during the period.Capital allocationThe allocation of capital between specific operations and activities is, to a large extent, driven by optimisationof the return achieved on the capital allocated. The amount of capital allocated to each operation or activityis based primarily upon the regulatory capital, but in some cases the regulatory requirements do not reflectfully the varying degree of risk associated with different activities. In such cases the capital requirementsmay be flexed to reflect differing risk profiles, subject to the overall level of capital to support a particularoperation or activity not falling below the minimum required for regulatory purposes.The process of allocating capital to specific operations and activities is undertaken independently of thoseresponsible for the operation, by Group Risk and Group Credit, and is subject to review by the Group CreditCommittee or ALCO as appropriate. 26 ANNUAL REPORT 2006
  29. 29. FBC Holdings Limited strength • diversity • service Corporate Governance (cont’d) 31 December 2006 RISK MANAGEMENT AND CONTROL (cont’d) Although maximisation of the return on risk-adjusted capital is the principal basis used in determining how capital is allocated within the Group to particular operations or activities, it is not the sole basis used for decision making. Account also is taken of synergies with other operations and activities, the availability of management and other resources, and the fit of the activity with the Groups longer term strategic objectives. The Groups policies in respect of capital management and allocation are reviewed regularly by the Board of Directors. (h) Reputational risk This is the potential that negative publicity regarding the Group, whether true or not will cause a decline in the customer base, costly litigation or revenue reductions. The Board through the Group Executive Committee ensures effective reputational risk management through inter-alia; Codes of Conduct, staff training, policies and independent oversight of functions. Reviews of the Group business practices are done periodically by the Group Internal Audit, the Group Compliance Officer and Risk Management. (i) Compliance risk Compliance risk is the current and prospective risk to earnings or capital arising from violations of, or non-conformance with laws, rules, regulations, prescribed practices, internal policies and procedures or ethical standards. Management is accountable to the Board for designing, implementing and monitoring the process of risk management and integrating it with the day to day activities of the Group subsidiaries.27 ANNUAL REPORT 2006
  30. 30. Independent Auditors ReportTO THE MEMBERS OF FBC HOLDINGS LIMITEDWe have audited the accompanying inflation adjusted financial statements of FBC Holdings Limited, set out on pages29 to 73, which comprise of the balance sheet as at 31 December 2006, the income statement, statement of changes inequity and cash flow statement for the year then ended, and a summary of significant accounting policies and otherexplanatory notes.Managements responsibility for the financial statementsManagement is responsible for the preparation and fair presentation of these financial statements in accordance withInternational Financial Reporting Standards. This responsibility includes: designing, implementing and maintaininginternal controls relevant to the preparation and fair presentation of the financial statements that are free from materialmisstatements, whether due to fraud or error; selecting and applying appropriate accounting policies; and makingestimates that are reasonable in the circumstance.Auditors responsibilityOur responsibility is expressing an opinion on these inflation adjusted financial statements based on our audit. Weconducted our audit in accordance with International Standards on Auditing. Those standards require that we complywith ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financialstatements are free from material misstatement. An audit involves performing procedures to obtain audit evidence aboutthe amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment,including the assessment of risk of material misstatement of the financial statements, whether due to fraud or error.In making those risk assessments, the auditor considers the internal control relevant to the entitys preparation and fairpresentation of its financial statements in order to design audit procedures that are appropriate in the circumstance,but not for the purpose of expressing an opinion on the effectiveness of the internal controls in place. An audit alsoincludes evaluating the appropriateness of accounting policies used and reasonableness of accounting estimates madeby management, as well as evaluating the overall presentation of the financial statements. We believe that the auditevidence that we have obtained is sufficient and appropriate to provide a basis for our opinion.OpinionIn our opinion the inflation adjusted financial statements present fairly, in all material respects, the financial positionof FBC Holdings Limited as of December 31 2006, and of its financial performance and its cash flows for the year thenended in accordance with International Financial Reporting Standards. The financial statements have been properlydrawn up in accordance with the relevant provisions of the Companies Act [Chapter 24:03], the Banking Act [Chapter24:20], Insurance Act [Chapter 24.07], Zimbabwe Stock Exchange Act [Chapter 24:18] and the Building Societies Act[Chapter 24.02].Other mattersThe historical cost accounts are given as supplementary information and do not form part of the financial statements.KPMGChartered Accountants (Zimbabwe)Harare14 February 2007 28
  31. 31. FBC Holdings Limited strength • diversity • service Consolidated Balance Sheet As at 31 December 2006 Inflation adjusted Historical Notes 2006 2005 2006 2005 $M $M $M $M EQUITY Share capital and share premium 3.3 7 019 7 018 22 21 Retained earnings 18 127 7 471 18 244 565 Other reserves 4 10 181 165 9 143 127 Total equity attributable to equity holders of the company 35 327 14 654 27 409 713 Minority interests 4 898 1 078 4 141 65 Total equity 40 225 15 732 31 550 778 LIABILITIES Deposits from customers 5.1 35 239 19 264 35 239 1 332 Deposits from banks 5.2 8 409 160 8 409 12 Other liabilities 5.3 8 928 10 555 9 026 763 Current tax liabilities 4 071 1 753 4 071 127 Deferred tax liabilities 15.1 4 873 3 856 3 771 206 61 520 35 588 60 516 2 440 101 745 51 320 92 066 3 218 ASSETS Cash and cash equivalents 6 11 422 10 389 11 422 752 Trading assets 7.1 11 531 14 709 11 531 1 065 Pledged assets 7.2 6 234 2 872 6 234 208 Investment securities 7.3 493 568 493 42 Bonds held to maturity 7.4 7 598 - 7 598 - Loans and advances to customers 8.1 5 664 3 573 5 664 259 Other assets 8.2 35 796 7 339 34 784 517 Investment in associate 8.5 2 690 883 805 21 Property and equipment 9.1 19 137 9 473 13 482 322 Intangible assets 9.2 1 180 1 514 53 32 101 745 51 320 92 066 3 21829 ANNUAL REPORT 2006
  32. 32. FBC Holdings Limited strength • diversity • serviceConsolidated Income StatementFor the year ended 31 December 2006 Inflation adjusted Historical Notes 2006 2005 2006 2005 $M $M $M $MInterest income 10 124 655 38 717 46 999 1 245Interest expense 11 38 549 12 335 14 017 396Net interest income 86 106 26 382 32 982 849Fee and commission income 3 394 3 885 1 264 121Dealing profits, trading andforeign exchange income 1 549 9 051 563 276Other operating income 12 8 989 4 380 3 773 125Total income 100 038 43 698 38 582 1 371Impairment loss on financial assets 8.9 19 509 19 37Depreciation and armotisation 9 2 334 1 869 59 10Personnel expenses 13.1 19 107 9 985 6 965 297Other expenses 13.2 9 898 5 916 3 898 177Operating lease payments 46 27 15 1Monetary loss 49 075 18 100 - -Operating profit 19 559 7 292 27 626 849Share of results of associate 1 425 615 402 19Profit before taxation 20 984 7 907 28 028 868Taxation 14 8 607 5 187 7 506 306Profit after taxation 12 377 2 720 20 522 562Atrributable to:Equity holders of the company 10 815 2 386 17 838 517Minority interest 1 562 334 2 684 45 12 377 2 720 20 522 562Earnings per share ($)Basic 31.62 7.08 52.16 1.54Diluted 29.96 6.70 49.41 1.46 30 ANNUAL REPORT 2006
  33. 33. FBC Holdings Limited strength • diversity • service Consolidated Statement of Changes in Equity For the year ended 31 December 2006 Inflation adjusted Ord. Retained Share Share Revaluation Minority Total shares profit premium Option Reserves Interest Reserve $M $M $M $M $M $M $M Balance at 1 January 2005 restated 4 7 338 6 887 5 52 - 14 286 Profit for the period - 2 386 - - - 334 2 720 Loss on available for sale assets - (43) - - - - (43) Employee share option scheme: - value of employee services - - - 33 - - 33 - share options exercised - - - - - - - Dividend paid - (2 210) - - - - (2 210) Revaluation - - - - 75 - 75 Share issue - - 127 - - 744 871 Shareholders equity at 31 December 2005/1 January 2006 4 7 471 7 014 38 127 1 078 15 732 Profit for the period - 10 815 - - - 1 562 12 377 Employee share option scheme - value of employee service - - - 1 519 - - 1 519 - share options exercised - - - - - - - General provisions - (159) - - - - (159) Revaluation - - - - 8 497 846 9 343 Share issue - - 1 - - 1 412 1 413 Shareholders equity at 31 December 2006 4 18 127 7 015 1 557 8 624 4 898 40 225 Historical Balance at 1 January 2005 restated - 95 20 - 3 - 118 Profit for the period - 517 - - - 45 562 Loss on available for sale assets - (3) - - - - (3) Employee share option scheme - value of employee service - - - 3 - - 3 - share options exercised - - - - - - - Dividend paid - (44) - - - - (44) Revaluation - - - - 121 15 136 Share issue - - 1 - - 5 6 Shareholders equity at 31 December 2005/1 January 2006 - 565 21 3 124 65 778 Profit for the period - 17 838 - - - 2 684 20 522 Employee share option scheme - value of employee service - - - - - - - - share options exercised - - - 550 - - 550 General provisions - (159) - - - - (159) Revaluation - - - - 8 466 1 168 9 634 Share issue - - 1 - - 224 225 - 18 244 22 553 8 590 4 141 31 55031 ANNUAL REPORT 2006
  34. 34. FBC Holdings Limited strength • diversity • serviceConsolidated Cash Flow StatementFor the year ended 31 December 2006 Inflation adjusted Historical 2006 2005 2006 2005 $M $M $M $MCASH FLOWS FROMINVESTING ACTIVITIESProfit before taxation 20 984 7 907 28 028 868Adjustments for:Depreciation and amortization 2 334 1 869 59 10Impairment of non-financial assetsImpairment of loans and advances 19 509 19 37Other non cash flow items (263) (1 449) 170 (51)Net cash generated before changesin operating assets and liabilities 23 074 8 836 28 276 864Change in trading assets 3 178 ( 7 059) (10 466) (1 054)Change in pledged assets (3 362) 313 (6 026) (51)Change in loans and advancesto customers (2 269) 14 496 (5 583) (244)Change in other assets (36 062) (79) (41 862) (343)Change in deposits from banks 8 249 (2 250) 8 397 8Change in deposits from customers 15 975 (5 860) 33 907 1 070Change in other provisions andliabilities (1 627) 3 904 8 263 701 7 156 12 301 14 906 951Income tax paid (4 455) (6 482) (2 829) (76)Net cash flow fromoperating activities 2 701 5 819 12 077 875CASH FLOW FROM INVESTINGACTIVITIESNet cash on investment securities 75 677 (451) (49)Purchase of property and equipment (3 160) (5 286) (1 180) (154)Proceeds from sale of propertyand equipment 113 64 29 2Purchase of intangible assets (109) - (30) - (3 081) (4 545) (1 632) (201) 32 ANNUAL REPORT 2006
  35. 35. FBC Holdings Limited strength • diversity • service Consolidated Cash Flow Statement (cont’d) For the year ended 31 December 2006 Inflation adjusted Historical 2006 2005 2006 2005 $M $M $M $M NET CASH BEFORE FINANCING CASH FLOW FROM FINANCING ACTIVITIES Share issue and minority contribution 1 413 296 225 6 Dividend paid - (2 210) - (44) Net increase/(decrease) in cash and cash equivalents 1 033 (640) 10 670 636 Cash and cash equivalents at the beginning of the year 10 389 11 029 752 116 Cash and cash equivalents at the end of the year 11 422 10 389 11 422 75233 ANNUAL REPORT 2006
  36. 36. FBC Holdings Limited strength • diversity • serviceAccounting Policies31 December 2006BASIS OF PREPARATION(a) Statement of complianceThe consolidated financial statements have been prepared in accordance with the International FinancialReporting Standards (IFRSs) and interpretations adopted by the International Accounting Standards Board(IASB), and the requirements of the Companies Act (Chapter 24:03) and the Banking Act (Chapter 24:20),Insurance Act (Chapter 24:07), Zimbabwe Stock Exchange Act (Chapter 24:18) and the Building SocietiesAct (Chapter 24:02).International Financial Reporting Standards (IFRSs) include standards and Intepretations approved bythe IASB as well as International Accounting Standards (IAS) and Standing Interpretations Committee(SIC), Interpretations issued under previous constitutions.The financial statements were approved by the Board of Directors on 14 February 2007.(b) Basis of measurementThe consolidated financial statements have been prepared on the historical cost approach and restated totake account of the effects of inflation in accordance with IAS 29 (Financial Reporting in HyperinflationaryEconomies) as described below, except that the following financial assets and liabilities are stated at theirfair value: financial instruments at fair value through profit and loss; financial instruments classified asavailable for sale; investment properties, buildings and cash settled share based payment arrangements.Non current assets held for sale are stated at the lower of carrying amount and fair value less costs to sell.The economy in Zimbabwe is considered to be a hyperinflationary economy. IAS 29 requires that financialstatements prepared in the currency of a hyperinflationary economy be stated in terms of the measuringunit current at the balance sheet date, and that corresponding figures for the previous period also be restatedin terms of the same measuring unit. Accordingly the inflation adjusted financial statements represent theprincipal financial statements of the Group. The historical financial statements have been provided by wayof supplementary information.Although IAS 29 discourages the presentation of historical financial statements when inflation adjustedfinancial statements are presented, historical financial statements have been included to allow applicationof the standard by the Group. The Zimbabwe Accounting Practices Board and the Zimbabwe Stock Exchangehave permitted companies in Zimbabwe to present historical financial statements for a transitional period. 34 ANNUAL REPORT 2006
  37. 37. FBC Holdings Limited strength • diversity • service Accounting Policies (cont’d) 31 December 2006 In accordance with IAS 29, the financial statements and the corresponding figures for the previous period have been restated to take account of the changes in the general purchasing power of the Zimbabwe dollar and as a result are stated in terms of the measuring unit current at the balance sheet date. The restatement is based on conversion factors derived from the Zimbabwe Consumer Price Index (CPI) compiled by the Zimbabwe Central Statistical Office. The indices used were as follows: Dates Indices Conversion factors December 2006 665 774.1 1.000 December 2005 48 205.6 13.8111 December 2004 7 028.7 94.7222 The main procedures applied in the above-mentioned restatement of transactions and balances are as follows: • All corresponding figures as of and for the period are restated by applying the change in the index from 31 December 2005 to 31 December 2006; • Monetary assets and liabilities, are not restated because they are already stated in terms of the measuring unit current at balance sheet date; • Non-monetary assets and liabilities that are not carried at amounts current at balance sheet date, and components of shareholders equity, are restated by applying the change in the index from the date/month of the transaction. • Property, plant and equipment are restated by applying the change in the index from the date of transaction, to the balance sheet date. Depreciation amounts are based on the restated amounts. • Income statement items except the depreciation, are restated by applying the average change in the index during the period to the balance sheet date; • Gains and losses arising from the net monetary asset or liability positions are included in the income statement; and • All items in the cash flow statement are expressed in terms of the measuring unit current at the balance sheet date. (c) Use of estimates and judgements The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. These estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other services. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognized in the financial statements are described in the notes. (d) Functional and presentation currency These consolidated financial statements are presented in Zimbabwe dollars (Z$), which is the Groups functional currency. Except as indicated, financial information presented in Z$ has been rounded to the nearest million ($’M).35 ANNUAL REPORT 2006