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Insurance for small businesses: What should be covered?

Insurance for small businesses: What should be covered?

Small firms contribute to more than 40% of South Africa’s gr...

Forward-thinking solutions to financial compliance woes

Forward-thinking solutions to financial compliance woes

According to a recent international survey conducted by Long...

Before you claim - know your facts

Before you claim - know your facts

Is buying insurance products simply a leap of faith? Persona...

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Tuesday, 13 November 2012 10:12

Life insurers need to prepare for a different future

Life insurers need to prepare for a different future

Half of life and pensions executives believe that the internet will influence the types of products that consumers choose

The emerging markets (Africa, Asia, the Middle East and South America) are seeing a rising demand for insurance products as their economies expand and their consumers acquire more wealth to protect, according to a report released by professional services firm PwC. Furthermore, almost 50% of insurance industry leaders see the emerging markets as more important than developed markets to their companies future.


These are some of the highlights from PwC’s new report entitled ‘Life Insurance 2020: Competing for a future’, in which 150 life and pensions executives were asked to comment on the effect and likelihood of a series of social, technological, environmental, economic and political situations, as well as setting out their short and medium-term priorities. The report also examines the developments that are likely to have the most decisive impact over the next five years and main opportunities for innovation, growth and competitive differentiation.


Victor Muguto, PwC Long-term Insurance Leader for Southern Africa, says: “The old adage that insurance is sold, not bought is being challenged. As customers use the internet and their own social networks to gain knowledge about the kind of products they need and use technology to determine the affordability and worth of insurance products, life insurers will need to adapt accordingly.


“The growth agenda is being shaped by the very different economic prospects and demographic profiles of emerging and developed markets. As urbanisation and longevity are increasing in emerging countries at a faster rate than in developed economies, there is enormous potential for life insurance businesses to grow in these markets.”


The study shows that life insurance is a shrinking market in some countries such as the US where the number of life policies is the lowest for 50 years. On the other hand, pensions and retirement income is a growing sector for developed nations and South Africa due to the changing demographics. The demand for pension products in the emerging markets is likely to catch up with the West as health improves and consumers live longer. As people live longer and government and employer support is withdrawn, there is a need to save more for retirement. Some countries, such as Australia have stepped in to make the taking out of pension plans compulsory. Others, such as the UK, are looking to influence behaviour by requiring all employers to make sure their employees are signed up for a pension.


Life insurers are likely to make significant changes to their business models over the next ten years. The cap on financial advisers’ fees in many countries and the planned elimination of commission for advisers in the UK will bring the value policyholders receive from these changes into the spotlight. Furthermore, technology will have an increasing influence over the way in which insurance is purchased in the future, states the report. 


The traditional life and pensions model in which policies are sold through intermediaries receiving a commission from the provider still prevails in China, India and many other South America, Africa, Asia and Middle-East (SAAAME) markets. More than 80% of the executives in the study believe that intermediaries in the future will become less tied to insurers as adviser commissions are withdrawn in some markets and customers seek greater impartiality. This could leave life companies with little direct contact with the customer and put further pressure on margins.


The report also found that half of insurance leaders believe that a combination of inflation, rising government debt and economic turmoil threatens the business of smaller insurers, particularly those in Western markets.


Muguto says: “Insurers, particularly smaller ones in Western markets, need to be brave enough to look beyond the short to mid-term problems facing their businesses and position themselves for the future. That means mapping the potential impact of social, technological, environmental, economic and political change. The amount of information and change out there is overwhelming but getting to grips with what the life insurance sector will look like in 2020 will help define a vision for the future.


“The effective use of technology by insurers is going to be a crucial factor. Consumers have become accustomed to the ease, intuition and elegance of digital retail interaction and want the same experience from life insurers. As smart phones and other mobile devices proliferate, customers will increasingly demand to be able to buy what, when and where they want. Insurers need to look at how best they can use technology to assist their customers and also consider simplifying products so that customers feel comfortable buying from them.”


“There is no certainty that existing players will be in the best position in five years’ time; indeed, with technology set to have such an impact, unwieldy legacy systems in many life companies could put them at a competitive disadvantage.  There is however a great opportunity for life insurers to play a part in resolving current issues. Finding a vision for the future that responds to some of the new macro trends will help demonstrate the value and purpose of insurance and also have a significant impact on how the industry is perceived.”

Other findings from the report include:

  1. 70% of insurance leaders said they expected public health provision to worsen and 40% believe social security systems will be drastically pared back over the next ten years. State support for ageing populations in many markets is being eroded by a combination of government debt and a decline in the ratio of working people to retirees and governments are looking to insurers to fill in the gaps in public provision.
  2. 50% believe that harnessing “big data” developments will provide a key source of competitive advantage and increased market share.
  3. A third (34%) expects that consumers will turn to their social networks to obtain advice and share information, reinforcing the demands for greater transparency.
Published in Insurance
Monday, 05 November 2012 00:00

Failure to manage VAT adequately can have an effect on a company’s bottom line

Failure to manage VAT adequately can have an effect on a company’s bottom line

Value-Added Tax (VAT) is fast emerging as the tax of the future, with governments worldwide shifting their focus from direct taxes to indirect taxes in the wake of the recent economic uncertainty. Rising budget deficits have placed pressure on many governments to look to raise additional forms of revenue, and they are increasingly turning to indirect taxes as the solution.


These are some of the highlights from PwC’s inaugural edition ‘Charting the changes, 21 years of VAT in SA’, which outlines the numerous reforms that have taken place in South Africa and on the African continent over the period as well as some of the challenges that lie ahead for the market.

Charles de Wet, PwC National Leader for Indirect Tax, says: “Indirect tax policies, legislation and compliance with the law are all under increasing scrutiny from governments and tax authorities.


“From a risk management perspective, it is important that VAT be managed properly as it can become a huge expense for a company if it is not correctly accounted for.” De Wet says that minor errors and flaws can have a cumulative effect where the volume of transactions is significant. Furthermore, if the VAT process is not adequately managed, it can have an effect on an organisation’s bottom line and even disrupt procedures and processes.

“Companies face significant compliance risk coupled with hefty penalties and interest levied by the tax authorities, as well as disruption to businesses and increasing reputational risk.”


Worldwide the efforts of governments to improve tax compliance have also placed increasing pressure on companies to put risk management high on the board’s agenda, he says. “The tax function needs to assume more responsibility for tax than the finance function of the organisation. Clear policies need to be put in place as to how the VAT function should be managed.”


Tax departments have up to now tended to focus their attention on direct taxes. “This will have to change with the emphasis being placed on VAT and indirect taxes,” says De Wet. “Organisations need to put adequate and efficient resources, processes and technology in place to manage VAT challenges.

“On the face of it, VAT may seem a simple and acceptable tax to businesses as it is passed on to the consumer. However, there is an invisible cost to organisations which is extremely high and burdensome, namely that of compliance with the law.”


De Wet says although the basic principles of VAT are similar in most countries, the administrative practices, and rules and regulations applied tend to differ which can affect the compliance burden for businesses. VAT returns are required at different frequencies; monthly, bi-monthly, or quarterly, he explains. “This will have a significant effect on how long it takes a business to comply with VAT.”


South Africa is considered to have one of the highest VAT burdens in the world, according to research carried out by PwC Tax Services. It takes far longer for companies to comply with the VAT laws than corporate income tax. Companies have to complete three tax returns for company tax purposes. Organisations with an annual income of more than R1 million have to complete 12 tax returns for VAT purposes.


The PwC report highlights the increasing focus on improving the administration of VAT, including the use of electronic filing of VAT returns and reducing the compliance burden on the taxpayer, with the report drawing on data gathered from analysts across the PwC Southern Africa indirect taxes network.


To date VAT has been implemented in 151 economies worldwide.  De Wet says there is no VAT system in the world without flaws if one has to carry out a comparison and review of such systems. “There is a need for the tax authorities to eliminate non-compliance with the laws and fraud.” Established VAT systems such as those in the European Union appear to have fewer opportunities for fraud and higher levels of compliance than those introduced in the past decade.

Other key highlights from the PwC report include:

  • Most countries in Africa tend to apply a single tier system of VAT, which, if properly administered is better than sales or turnover tax, as it leaves an audit trail;
  • South Africa’s banking system could face higher VAT costs in the wake of new regulations;
  • State owned entities need to include VAT compliance in their strategic planning activities and where necessary, be prepared to defend business and VAT decisions from tax officials;
  • There is a general trend for tax authorities to take a more aggressive approach to compliance and penalties are reflective of this;
  • All countries with a VAT regime are now using automation to some degree.
Published in Tax
Tuesday, 30 October 2012 15:28

Consumer and education print books stand to lose readership to digital market

Consumer and education print books stand to lose readership to digital market

The consumer book market in South Africa continues to face a number of limitations in the wake of high illiteracy, low incomes and the fact that most books are published in English and Afrikaans, which effectively excludes large segments of the population from reading. Due to relatively small print runs and the 14% Value-Added Tax (VAT) rate levied in South Africa, which is higher than in many other countries, prices are relatively high and unaffordable for many, which further constrains the market.


These are some of the findings of PwC’s recent report entitled: South African Entertainment & Media Outlook 2012-2016 (‘The Outlook’). The third edition of The Outlook presents annual historical data for 2007-2011 and provides annual forecasts for 2012-2016 in 12 entertainment and media segments.


Vicki Myburgh, Entertainment & Media Industries Leader for PwC Southern Africa, says: “Illiteracy continues to be relatively high in South Africa. The Government is taking steps to address this as part of its Industrial Policy Action Plan, with the goal of eliminating illiteracy by the end of the decade.


“Furthermore, growth in the number of people in the key demographic segment for consumer books – people 45 and older – and continued economic expansion will sustain the consumer book market.”

Consumer books

The print consumer book market rose 2.8% in 2011, down from the 4.4% increase in 2011. The consumer book market is limited in South Africa because of the country’s high rate of illiteracy (about 12%), low income and few books published in African languages.


However, Myburgh says all is not “doom and gloom”. “The economy is expanding, which should help make books affordable to more people. The illiteracy rate has also dropped about 1% in recent years, which, while not dramatic, should still expand the potential market for books.” Furthermore, the key reading segment of the population – people 45 and older – rose by 7.2% between 2006 and 2011 and is expected to expand by 4% during the next five years, rising to 10.9 million in 2016. “This continued growth is expected to benefit the consumer book market.


“While the improved economy and the ageing population will have a positive effect on print sales over the next five years, we expect that the loss of avid readers to e-books, particularly readers of mass-market paperbacks and the growing penetration by e-reading devices will continue to cut into print sales.”

The Outlook projects spending on print consumer books to reach R1.7 billion in 2016 from R1.5 billion in 2011.

Electronic books

The electronic consumer books market is still relatively new to South Africa.  Electronic consumer sales doubled since 2010 to R2 million in 2011. The lower reported spending compared to the previous year’s outlook is due to books on CDs and DVDs, which were combined with electronic books in the past, but which are now included in the print/audit category. This resulted from the Publishers’ Association of South Africa defining new categories that separate books on CDs and DVDs from electronic books.


“Electronic book sales are growing rapidly in other countries, such as the US and the UK, and we expect they will also take off in South Africa,” says Myburgh. “Nevertheless we are not projecting a significant market during the forecast period.” Electronic consumer book sales are expected to rise to R19 million in 2016 from only R2 million in 2011.

Educational books

The financial recession of 2009 led to a 14.9% decline in educational print sales of educational books. Spending on educational printed books fell 3.9% in 2010 and by an additional 0.4% in 2011.


The educational book market is likely to benefit from a revision in the curriculum in the next two years as well as the expanding economy, but this growth is expected to be offset by the declines in the school-age population, says Myburgh. During the next five years the number of students aged 6-19 years at school level is projected to decline by 4.5%. At the university and college level, the segment level of students aged 20-25 years is projected to decrease by 10.7% during the next five years. “Falling enrolment at schools, universities and colleges will cut in the demand for educational books.”


As in the consumer book market, electronic books are becoming a significant competitor to the print market, particularly at the college and university level as a result of the increased popularity of e-readers and tablet computers.


Electronic books are also beginning to be present at the school level, with a growing awareness in digital learning. However, there is a constraint at school level in that not all students have access to computers or tablets. Some schools are investing in laptops and tablets, which will expand the market for electronic books, but budget constraints and spending restrictions, are making this a slow process.


Myburgh says: “A key opportunity for publishers lies in the development of digital learning platforms for the classroom. Publishers will need to develop more advanced digital products such as interactive whiteboard software; in-class assessment tools and data differentiated instruction.”


The overall educational book market is expected to expand at 0.5% compound annual rate to R2.39 billion in 2016 from R2.33 billion in 2011. Electronic books will account for an estimated 1.7% of total spending on educational books in 2016, compared with 0.3% in 2011.


Myburgh concludes: “Printed books will continue to dominate the consumer and educational publishing market for some years, but e-books and other digital products present a new way to the market.


“This has created opportunities for growth but will force authors, publishers, distributors and retailers to revise their strategies.”


Published in Online
Friday, 19 October 2012 10:25

Difficult economic times see a rise in fraudulent activities

Difficult economic times see a rise in fraudulent activities

Recessions impact on companies in many negative ways. However, one impact that is often not fully understood is the psychology of employees on all levels. Cutbacks and austerity measures will often find employees with less than expected earnings, particularly in light of diminished or absent incentives or bonuses. Many employees budget on these and with sudden downturns, they suddenly find themselves with less than expected capital. This can often lead to illicit actions on the employees’ part shares Manpower South Africa and clinical psychologist Dr Giada Del Fabbro.


There are various forms of fraud occurring in South Africa, but the most common are theft, financial statement fraud and bribery and corruption. A recent study by KPMG found that about 30% of their top clients in Africa said that employee fraud had the highest effect on their business. The onset of the global economic crises and recession saw an increase in these and according to the PricewaterhouseCoopers' Global Economic Crime Survey 2009, almost two out of three South African organisations said they were the victims of fraud in 2009, the year after the economic crisis began. 54% of these said that fraud in their companies had increases during this period.


Recent crime statistics from the South African Police service shows that commercial crime between April 2009 and March 2010 had increased by 51% over 2003 figures.


The tightening of regulations implemented by banks and lending institutions sees less money available to borrow for those in tight situations. It also occurs due to one partner in a marriage, business etc. losing their position, leaving the remaining ‘breadwinner’ with heavier financial pressure. Furthermore, when management and in particular, middle management, suffers from staff cuts, it leaves gaps for ‘catching’ illicit activity.


It does not however only apply to fraud occurring during the recessions, often, the increased scrutiny that finances go through during a recession will bring up earlier fraud that went unnoticed. Additionally, when the company’s profits are endangering people’s jobs, they’ll not be as likely to look the other way. One person defrauding the company could mean someone’s position and so they will be more likely to blow the whistle on fellow employers they suspect of fraudulent behaviour.


The PricewaterhouseCoopers' Global Economic Crime Survey found that 62% of economic crimes were committed by people inside the organisation, and 38% by external individuals. A considerable amount, 23%, of fraud cases where discovered due to informal tip-offs and a further 21 percent were discovered through official whistle blowing channels. Only 15% was discovered through risk management systems, while 18 percent was discovered by accident.


From a psychological point of view, many employees will actually rationalise their fraudulent behaviour.


Dr Giada Del Fabbro, clinical psychologist states, “You will always get a certain personality type which will lean towards this kind of behaviour, with a psychopathic tendency to exploit situations for their own benefit. In times of economic difficulties, if there is a perception on the employees part that the spoils are unequal, such as that upper management is getting the benefits that are not filtering down, they will feel entitled to take it for themselves. During recessions it becomes more prevalent as it boils down to a simple fight for survival, where individuals have to fill basic needs. Then the levels of intensity increase as the individual feels more justified to do what they’re doing even if it is illegal or fraudulent.”


“Businesses themselves however can also take on certain ‘personality’ traits as an entity in their own right. As a recession causes business and recourses to become less, so the environment becomes more competitive, this may cause some business to start displaying similar ‘corporate’ psychopathic behaviours in order to acquire business.”


“In order to combat this rise in fraud during recessions, HR departments should facilitate channels that promote communication between the business and the employee. Being unheard builds resentment, decreases loyalty and increases the sense of entitlement that leads to fraud,” explains Dr Del Fabbro.


The prevalence of fraud is shown by the fact that those companies who engage in frequent fraud finding practices find more fraud than those who don’t. Showing that a lot of fraud goes unfound without frequent checks. However, even though almost half of fraud victims said that they believe fraud is on the increase, 68% percent said that they had made no change to their operations to detect fraud in future.


It’s important to look out for certain tell tale signs that may indicate fraud. For individuals, fraud is often signified by increased levels of stress, a lifestyle above their salary, personal financial problems, unwillingness to take leave and aversion to delegate responsibilities. Company financial indicators include a rise in cash transactions, large differences in expense claims, unexplained rising costs and increased customer complaints and refunds.


Finance directors need to be wary of the increases in fraud during a downturn and the reasons for it. This will help in identifying areas and employees to scrutinise more closely when they find themselves in these situations. It’s essential to be exacting with anti-fraud measures, to have effective reporting channels and to carry out checks often with proper detection mechanisms and data analysis.

Friday, 19 October 2012 10:13

New way of integrated accounting and reporting will allow companies to place monetary value on environmental impact of their products

Puma instore display

A new method of integrated accounting and reporting will allow companies to place a monetary value on the environmental effects of their products, says professional services firm PwC.  “A paradigm shift is required by companies in the way they currently do business and account for all costs and report to stakeholders. The importance of comprehensive stakeholder reporting has been brought to the fore in the wake of the recent economic uncertainty, social disparity and environmental degradation,” says Jayne Mammatt, an Associate Director within PwC’s Sustainability and Integrated Reporting Department.


There are signs that at least some institutions worldwide are taking the issue of sustainability reporting seriously. Sports and lifestyle firm Puma, with the support of PwC and Trucost, recently launched the results of its first product level Environmental Profit & Loss (EP&L) accounts, which place a monetary value on the environmental impact of products. “The accounting method is designed to give a better understanding of the environmental impact of the company and boost its competitive position in industry,’ says Mammatt. Currently accounting practices do not make recognition for the lost value of natural systems destroyed by the industry and as a result they are not protected by market forces.


The results compare the environmental impact from cradle to grave of a conventional shoe and T-shirt with more suitable alternatives and illustrate how a sustainable approach to production reduces the impact on the environment by a third compared to conventional products. The analysis focused on the environmental effects caused by greenhouse gas (GHS) emissions, waste and air pollution, as well as the use of natural resources such as water and land along the entire value chain from the generation of raw materials and production processes to the consumer phase when customers wash, dry, iron and finally dispose of the products.


Mammatt says: “By putting a value on even one product’s environmental impacts, it brings into sharp focus the debates over commodity pricing, natural resource scarcity and supply. Even as an emerging methodology, it challenges conventional business thinking – and consumers’ views – on how we measure and monitor the embedded environmental value and impacts of what we buy.


She says that the EP&L accounting method is the way in which integrated reporting is likely to head in the future. Mammatt anticipates that companies in South Africa will follow suit, particularly in the light of stricter regulations, rising energy prices and widespread resource scarcity. “Although it’s a novel field for financial accounting, it is a significant step for companies that are likely to be followed, given the requirements of the King III Report on Governance and the JSE Listing Requirements relating to integrated management and reporting.”

Published in Financial Reporting
Online editions attracting more readers in South Africa

South Africa is experiencing an increase in the growth of readership for traditional newspapers and a developing digital market, in contrast to the more developed countries, which are experiencing a migration of readers to online platforms. Unit circulation has however been steadily declining over the past few years and this trend is expected to continue into the future. This anomaly arises from newspapers increasingly being shared by more readers.


Although there has been a significant increase in the growth of readership of newspapers, it remains to be seen if this trend will continue as broadband penetration increases in the market and online editions start to attract more readers. These are some of the findings of PwC’s recent South African Entertainment & Media Outlook 2012-2016 (‘The Outlook’) report.


The total newspaper market in South Africa rose by 5.7% in 2011 to R11.4 billion, a significant increase from the 1.9% growth recorded in 2011. This increase was largely due to strong growth in advertising spending (10.8%) offsetting a 6.4% decline in circulation spending. Although there was an increase in overall newspaper readership of about 7.7% in 2011, this was mainly as a result of more people reading the same copy, rather than increased paid-unit circulation. There was a net drop in paid unit circulation of 6.7%, with a subsequent decline in overall circulation spending.


The overall incidence of newspaper readership increased from 29.4% at the end of 2010 to 30.8% at the end of 2011. The study found that the growth of readers tended to be among the larger newspapers, which generate more advertising than smaller titles.


Vicki Myburgh, Entertainment & Media Industries Leader for PwC Southern Africa, says: “It remains to be seen if the growing readership trend for print newspapers will continue as online editions are attracting more readers. We expect print readership growth to slow and ultimately decline as digital readership expands. This will have a significant effect on the advertising growth of newspapers.”


The Outlook shows that the improving advertising market for newspapers led to several new launches in the market in 2011. Myburgh says that new launches tend to run contrary to the trend in other countries where newspapers are closing shop. “The launch of new editions provides additional outlets for advertisers and contributes to an overall growth in advertising.”

With economic growth expected to moderate in 2012, the study projects advertising growth to improve to 7.1% in 2013 and to average 8.5% compounded annually during 2014-16.


As broadband penetrates the market, the potential for digital content and advertising is increasing significantly. The major newspaper titles in South Africa also have online editions that are attracting a small, but growing advertising stream. The study predicts digital newspaper advertising to expand at annual rates in excess of 20% during the next five years, reaching about R472 million in 2016. Digital newspaper circulation spending is projected to total an estimated R52 million in 2016, up from only R1 million in 2011.


Myburgh says that newspapers are also seeing an ongoing shift in classified advertising from print to the Internet. “Classified advertising on the Internet tends to be more easily searchable than in print. Furthermore, the rates are lower and ads can be inserted anytime, can be changed easily and are not as limited with respect to word count.”

When digital advertising is included, total newspaper advertising is forecast to grow by an estimated 7.9% on a compound annual basis during the next five years, rising to R12.3 billion in 2016 from R8.4 billion in 2011.


Print circulation

Although the growth of readership of newspapers rose during the past two years, circulation figures fell, declining by 6.3% in 2010 and a further 6.7% in 2011. Between 2007 and 2009, the cumulative decline for the two year period was 5.7%, less than half of the decrease of the past two years.


“As broadband penetration increases, we can expect a decline in circulation in print newspapers. Because South Africa is still well behind other countries in broadband penetration, it will experience rapid broadband growth in the coming years. Consequently, we expect steeper declines in newspaper unit circulation compared with most other countries,” says Myburgh.


As the economic climate improves, declines are expected to even out to 5.6% annually during 2015 – 2016, which will still be sharper than in most other countries, states the report.


Digital circulation

While readers do not appear to be willing to pay for online newspapers, they do appear to be willing to pay for the convenience of having a newspaper downloaded to a mobile device. A paid digital circulation market is developing in a number of countries as the convenience of having a newspaper on a mobile device increases, states the report. As the cost of accessing the internet decreases and more people get connected, fewer people will turn to print newspapers, particularly those that they have to pay for their information. This may be regarded as a negative trend but does point to an opportunity in the digital news sphere, says Myburgh. “


Tablets are proving to be popular in South Africa and as prices come down, we expect penetration to expand.” As the penetration of tablets and the quality of available news applications increases, the potential market for paid digital circulation will increase. The report projects that by 2016 paid digital unit circulation will total 86 000 from only 2 000 in 2011.


Generally people still view digital products as inferior to products in their traditional physical formats and have only been willing to buy digital products at a discount. “We expect this behaviour to characterise digital newspaper use.” Average annual newspaper spending is projected to be less than half of print newspapers and to decline from R610 in 2011 to R600 by 2016. Aggregate spending will total an estimated R52 million in 2016, up from only R1 million in 2011.


Myburgh says that traditional print sales will continue to decline for the foreseeable future. “Emerging technologies create new opportunities for the newspaper industry to increase online distribution and to reach larger audiences.


“Partnerships and acquisitions will be vital, allowing penetration into new markets and diversifying revenue streams. Tablets and mobile devices will provide access to a more youthful demographic and will help newspapers evolve their offering to appeal to younger readers.”

Published in Online
South Africa’s banking sector remains sound and profitable despite economic uncertainty

The financial results of South Africa’s four major banks for the six months ended 30 June 2012 have remained resilient despite the recent global economic uncertainty, according to a report issued by professional services firm PwC.

“Although in most cases not directly, our banks have had to cope with another six months of global financial instability, particularly in Europe. The downside risks in Europe remain elevated, which is weighing heavily on market sentiment and it appears that will be the case for some time,” says Tom Winterboer, Financial Services Leader for PwC Southern Africa and Africa.

Despite these difficult economic circumstances, the four major South African banks (Absa, FirstRand, Nedbank and Standard Bank) posted combined headline earnings of R21.3 billion, up 17% from the comparable period last year and average normalised return on equity (RoE) of 15.9%. This compares favourably to a benchmark group of Western global peers that recorded average RoE for the 2011 financial year in the range of 2.1% for US commercial banks and 14.7% for Canadian banks.

“This was a strong performance by South African banks compared to the Western world. Even more interesting is the composition of earnings for local banks when compared to other countries, which shows that our banks have an enviable non-interest revenue mix and continue to operate at favourable efficiency ratios,” says Johannes Grosskopf, PwC Banking and Capital Markets Leader for Southern Africa.

These are some of the findings from PwC’s South Africa Major Banks Analysis Report. The report analyses the results of South Africa’s major banks for the six months ended 30 June 2012.

Capital levels continue to be a strength. Total qualifying capital and reserve funds across the major banks showed moderate growth. However, the combined total capital adequacy ratio of the major banks declined marginally by 50bps to 14.9% from 15.4% at the second half of 2011.The slower growth in capital and decline in capital adequacy levels reflect the capital challenges faced by the major banks. This is a result of six months of Basel II.5 implementation as well as the prospect of Basel III regulations set to be implemented on 1 January 2013.

“The major banks have all indicated that the transition to the higher capital requirements anticipated by Basel III will take place without significant difficulty or deterioration in regulatory capital levels. This can largely be attributed to ongoing risk-weighted asset optimisation initiatives of the major banks, a prudent approach to business as well as the relatively prudent regulatory capital regime adopted by the regulator over the years,” says Grosskopf.
However, there is some uncertainty over key aspects of the regulations, such as countercyclical buffers, domestic systemically important banks surcharge and the finalisation of the recovery and resolution regime that will affect the final capital landscape.

Furthermore, it is expected that all of the major banks should be able to comply with the Liquidity Coverage Ratio (LCR) envisaged by Basel III requirements, supported by the committed liquidity facility that the Reserve Bank recently announced it would make available to mitigate potential liquidity shortfalls.

The most sensitive areas underpinning the results continue to be the banks’ ability to grow revenue, contain their bad debt charge and manage their cost base.

Total income, up by 12%, shows a focus on margin protection and transactional revenues. Compared to the prior period, banks’ operating expenses increased by only 1.5%, while total operating income increased by 4.8%. Consequently, their combined cost-to-income ratio improved from 58.1% in the first half of 2011 to 55.9% for the same period of 2012.

Salaries, which continue to represent about half of the total expense bill, grew at a rate of 12.6% in the first half of 2012, when compared to the same period for 2011. This increase reflects annual salary increases as well as the increased short- and long-term incentive awards associated with the improved operating performance of the banks.
“We have already seen that the next generation of productivity improvements will come from responding to changes in customer expectations by deploying strategic technology solutions,” he says. Leveraging distribution in the world of social media will require making further improvements in the use of customer analytics to unlock value. The key being able to integrate all the levers at the banks’ disposal to further improve customer engagement. These include rethinking product solutions in a Basel III world, harnessing technology for customer convenience, optimising internal centres of excellence and improving operational efficiencies.

Total balance sheet impairments increased 12.2% to R52 billion for the first half of 2012, compared to R48.8 billion at the end of the second half of 2011. Total income statement impairments increased 33.5% from the first half of 2011 to R14.2 billion at the end of the second half of 2012. Grosskopf points out that the banks have focussed on their NPL portfolios and the adequacy of their specific impairments on these portfolios. This focus will continue given the size of the NPL portfolio (which is in excess of R100 billion) and the state of the housing market.
Grosskopf concludes: “While there are some headwinds in the domestic economy and significant uncertainties from Europe, the banks continue to demonstrate the capability to manage and adapt. Compared to its international counterparts, the South African banking sector remains sound; being profitable, well capitalised and maintaining good returns on equity.”

Published in Banking
Monday, 10 September 2012 12:16

South Africa’s entertainment and media industry reaches the ‘end of the digital beginning’, according to PwC study

South Africa’s entertainment and media industry reaches the ‘end of the digital beginning’, according to PwC study

South Africa’s entertainment and media companies have reached the ‘end of the digital beginning’, with digital activities now becoming the ‘new normal’ for traditional media companies, according to a report issued today by professional services firm PwC.

Digital spending in the South African entertainment and media industry is expected to increase at an approximate 21% compound annual rate during the next five years, according to PwC’s South African Entertainment & Media Outlook 2012-2016 (‘The Outlook’). Although comprising 20.4% of overall spending in 2011, digital channels will generate 52% of the total increase in spending during the next five years.

This will largely be driven by the expanding internet market, broadband penetration as well as consumer spending on television subscriptions and video games.

According to PwC’s South African Entertainment & Media Outlook 2012-2016, digital spending will comprise 32.6% of the total entertainment and media market in South Africa by 2016.

Vicky Myburgh, Entertainment & Media Industries Leader for PwC Southern Africa, says: “We believe that the industry is at the end of the beginning of its digital journey. Entertainment and media companies have made a commitment to the delivery of digital entertainment and are now in the process of making the necessary changes to their products and organisations.

“The PwC study confirms that digital products and delivery is moving to the hearts of many media companies and beginning to present the greatest opportunities for growth in the immediate future. The core challenge for entertainment and media companies lies in how to remain relevant to their consumers and business customers in a way that differentiates them from their competitors. There are long-term structural and organisational changes that are needed right across the industry.”

However, The Outlook warns that newspapers and print media are being eclipsed by tablets, mobile smart phones and a raft of new digital and online communications media, led by internet and television advertising and video games.

The third edition of PwC’s South African Entertainment and Media Outlook presents annual historical data for 2007-2011 and provides annual forecasts for 2012-2016 in 12 entertainment and media segments.

The Outlook includes historical and forecast data on the Internet, television, filmed entertainment, radio, recorded music, consumer magazine publishing, newspaper publishing, consumer and educational book publishing, business-to-business publishing, out-of-home advertising, video games, and sports. It gives a detailed breakdown of each of these sectors.

“Despite the recent economic uncertainty, the past year has seen global and South African global sales of tablets and smart devices reach record levels underlining the growing revenue opportunities in the digital delivery of entertainment and media content as well as advertising to increasingly connected and mobile consumers. Companies are planning and executing their strategies to cross to the digital frontier,” says Myburgh.

The entertainment and media industry in South Africa went up 0.7 %in 2011, slowed by the absence of spending associated with the 2010 FIFA World Cup, which boosted that year’s total by 27.6%. Advertising in 2011 increased by 7.9%, down from the 14.7% increase recorded in 2010.

End-user spending, consisting of spending by consumers and other end-users on products and services produced by the entertainment and media industry, fell 2.3% in 2011, also largely due to the absence of spending associated with the FIFA World Cup in 2010. Sports declined by 39.7% and the remaining segments rose by 13.8%.

The fastest growing sectors in 2011 were the Internet at 27.3% and television at 13.4%. Out-of-home advertising at 11.6% was the only other category to increase by more than 10%.

Consumer magazine publishing rose 7.8% in 2011, followed by radio at 6.6% and newspaper publishing by 5.7%, the only other segments to grow by as much as 5%. According to The Outlook consumer magazines were propelled by a jump in print advertising, largely due to stronger economic growth, the launch of several new titles in industry, growth in readership and rising circulation. Improvements in the economy also boosted radio. Advertising in print newspaper also benefited in 2011 as Gross Domestic Product (GDP) posted its largest increase since 2008.

Myburgh says that the research shows that the internet is expected to be the fastest growing sector within the next five years with a projected 20.3% compound annual increase. Broadband and mobile access growth coupled with double-digit increases in Internet advertising will drive this market. Television is expected to be the next fastest-growing segment with a projected 10.3% compound annual increase.

Out-of-home advertising will be next at 9.3% compounded annually, driven by an increase in the penetration of digital screens, which provide more potential in terms of revenue as the same site can accommodate multiple advertisers. Furthermore, radio and sports are expected to show compound annual increases of 6.5%, followed by video games at 6.4%.

The findings of the study show that radio will be boosted by the addition of new commercial stations and the expansion of new community stations, while sports will largely be driven by rising media rights and strong growth in sponsorships. Consumer magazines and newspapers will be the only sectors projected to average in the vicinity of 5% growth compounded annually during the next five years. Consumer magazines will average 5.3% with Newspapers at an average of 5.1% as advertising growth offsets declines in circulation spending.

Spending in the industry is expected to reach a record level of R141.7 billion in 2016, a 10.2% compound annual increase from R87.4 billion in 2011.

“We anticipate that overall growth in the entertainment and media industry will closely track GDP growth over the forecast period,” says Myburgh.

“By embracing digital as the engine of their business, companies can position themselves to meet consumers’ changing demands through any channel and format – and more effectively and more profitably than ever before.”

Published in Media & Marketing
Friday, 31 August 2012 11:51

South Africa’s top 100 listed companies make positive progress on corporate reporting, but still some way to go

Intergrated Reporting

South Africa’s top 100 companies listed on the JSE have made positive progress in their corporate reporting initiatives, yet there remain areas for improvement, according to a report released by Professional Services Firm PwC.

Zubair Wadee, a director at PwC says: "Most companies appear to be comfortable disclosing those matters that have traditionally been a focus area, such as reporting related to audit committees, but appear to be less comfortable in addressing newer areas of governance introduced in the third King Report on Governance for South Africa, 2009, such as IT governance.”

The purpose of PwC ‘s ‘Moving from principle to practice: Corporate reporting survey’ is to assess reporting by entities both in terms of the King III Report, which became effective for all companies listed on the JSE with financial years commencing on or after 1 March 2010, and selected benchmarks arising from current developments in integrated reporting. The survey process involved an analysis of the integrated reports of the top 100 companies on the JSE for their financial periods beginning on or after 1 January 2011. The study focuses on pivotal areas contained in the King III Report, such as boards and directors; ethical leadership; the governance of information technology; the audit committee; compliance with law and rules; and integrated reporting.

South Africa was the first country to mandate integrated reporting for all listed companies. An integrated report brings together the material information about a company’s strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context in which it operates.

Professor Mervyn King, Chairman of the International Integrated Reporting Committee and non-executive Chairman of PwC’s Business School, says: “Integrated thinking is a revolution in management and board behaviour. The outcome of integrated thinking is the integrated report. All companies depend on a variety of resources and stakeholder relationships to create value and to sustain value creation.

“The world has changed and so must corporate reporting. The users of corporate reports need to make an informed assessment that the company will sustain value creation. The only way in which to do this is by means of a concise and clearly understandable integrated report.”

Wadee says: “There is an increased global focus by investors, regulators, markets and other interested stakeholders on the integrated reports that are being released by listed South African companies. They will be looking at the quality of reports and the trends as they start to evolve.”

Boards and disclosure

The study shows that there is room for improvement in reporting on the actual performance of the board and its committees. Although the board was cited in many cases as a formality, it was not possible to ascertain whether it was actually engaged in any of the listed activities of committees.

While the classification of board members in terms of independence was well disclosed overall, the process of assessing the stated independence of directors was not always adequately explained by companies.

The majority of companies (85%) reported on directors’ remuneration, keeping in line with the requirements for listed companies contained in the King III Report.

Ethical leadership and corporate citizenship

Most entities tended to shy away from reporting on the more progressive areas of the King III Report, for example, the disclosing of actual performance in terms of ethics.

The study suggests that the measurement of the effect of corporate citizenship initiatives is an area in which entities could improve by attaching statistics or financial investments to specific initiatives. ‘Something as simple as disclosing the number of families in a community that could have been affected by an entity’s actions could improve an integrated report,” says Wadee. One of the trends that is evident from the survey is that companies dedicate a significant amount of effort to reporting comprehensively, while not always considering whether those items that have been reported upon are material to the users on the report.

IT governance

As with other areas that are new to King III, most companies provided very little information about the governance of information technology. “This is concerning given the ubiquitous nature of IT in the operations of most entities,” he says. Only two-thirds of all entities surveyed indicated that the governance of IT is a board’s responsibility, while only a handful discussed the importance of IT in relation to the strategy of the company or discussed the implementation of an IT governance framework.

Audit committees

The role of the audit committee has increased significantly in the wake of the King III Report and it appears that most companies have understood the importance of this committee and are being seen to comply with the requirements of the report. There has been an increased focus on ensuring that the appropriate number of non-executive directors serves on the committee (more than 80%). Furthermore, most companies describe the role of the audit committee in risk management.

However, almost a third of audit committees did not provide adequate information relating to the audit committee’s oversight role in the implementation of a combined assurance model, or the appointment and performance review of the chief audit executive.

A refreshing trend has emerged whereby 82% of reports disclosed how the audit committee discharged its duties during the financial period under review. Wadee says that a potential focus area in future will be the appointment of a chief audit executive for internal audit by the audit committee, and oversight of this individual’s performance.

Risk governance

An overwhelming percentage of companies (90%) disclosed their key risks and how they were mitigated. However, only 25% of entities disclosed their risk appetite. “This is disappointing as most companies would presumably have this information readily available.

“While it is encouraging that the vast majority of boards of directors accepted responsibility for risk management and have disclosed how risk management has been aligned with the strategy of the company and integrated into the daily activities of the company, it is concerning that less than two-thirds reported on their assessment of the effectiveness of risk management,” says Wadee. Furthermore, less than a quarter of companies surveyed disclosed who the chief risk officer was.

Internal audit

The majority of companies reported that they had an internal audit function in place. However, the study shows there is some room for improvement in terms of reporting on how the internal audit reports to the audit committee (currently 85% of companies disclose this).

Laws and regulations

The majority of companies provided very little information about compliance with laws, rules, codes and standards. Wadee says that this is concerning, given that all companies operate within legal frameworks that could potentially have a detrimental effect both financially and from a reputational perspective for entities that do not comply with them.

Integrated reporting and disclosure

While most companies explained their vision and objectives in their reports, less than two-thirds of organisations surveyed disclosed the performance measures management uses to monitor the success of its actions. Furthermore, only half of integrated reports disclosed performance targets and the organisations’ achievement in respect of these targets.

Given that most entities express the desire to grow, the report finds it surprising to note that only half of the companies surveyed explain the key underlying external drivers for current and future growth. Also of concern is the neutrality and balance of the disclosures that companies provide. In 85% of reports surveyed, companies disclosed a positive effect, while less than a third of organisations disclosed any negative aspects.

Responsibility for sustainability reporting is also not clearly defined in almost a quarter of reports. Although all of the companies surveyed had a sustainability report, only 43% obtained assurance over the key elements of sustainability reporting, with half of these being assured by the external auditor.

An emerging trend is for companies to produce a separate sustainability report that does not form part of the integrated annual report, while incorporating material sustainability aspects into the integrated report. Although it is encouraging to note that entities value sustainability enough to devote an entire report to it, in some cases the integrated report does not contain enough information about sustainability issues to satisfy the criteria of the King III Report, says Wadee.

Wadee says: “While companies have made positive strides in moving towards integrated reporting, it has been an evolutionary rather than a revolutionary process. There are clear leaders in this field of reporting who have embraced the concept wholeheartedly, while others are taking a more cautious and reactionary approach, driven by what the leaders in this space are doing. Overall the effect is a positive one – reporting in South Africa is moving in the right direction.”

Listen to the podcast of Prof. Mervyn King's presentation of the findings to the survey!

Published in Financial Reporting
Thursday, 16 August 2012 11:10

Are we paying executives too much?

Are we paying executives too much?

A global outcry against high executive pay packages has put remuneration under the spotlight.

The real question is whether we are paying executives for a job well done, not whether we are paying them too much.

Economic Development Minister Ebrahim Patel, supported by the trade unions, is committed to levelling pay from lowest to highest paid workers, and has suggested putting a cap on executive pay. Much has been made of the Gini coefficient, the income ratio measuring the disparity in pay between highest and lowest paid employees. This is not the right yardstick for determining salary structures.

Companies need to pay top executives for performance. The challenge is: What key drivers are we measuring and how do we measure them? We need to measure performance that guarantees the viability of the organisation in the long term and doesn't simply focus on short-term profits.

Bad leaders can inflict untold damage on an organisation, damage that often manifests itself only long after the executive has left the building. If a CEO delivers solid profits, develops skills and safeguards the future of the company – why should he not get a top package?

Too often, however, there is an adverse relationship between executive remuneration and company performance. We need to reward the right drivers. Instead of the relentless pressure on short-term performance and bottom-line profit, we need additional focus on issues such as safety, welfare of employees, skills development and the long-term sustainability of the company.

In countries across the globe, from the US and the UK through Australia and Japan to South Africa, there have been shareholder revolts over pay increases in the private sector. However, it's not clear yet whether shareholders are taking more accountability and showing a greater commitment to the business, or are simply continuing to demand quick returns, measured in quarterly or six-monthly financial results, in which case any reduction in executive pay could result in increased shareholder profits.

In the UK, pending legislation gives shareholders considerable power. It proposes that shareholders should have an annual binding vote on a company's remuneration policies. These include composition and pay levels for each director, how proposed pay structures reflect and support company strategy, what the performance criteria are and how performance will be assessed. Investors want to know how their money is being spent. Creating a direct link between business strategy and reward is a positive step.

According to the 2012 PwC Executive Directors Remuneration Report, the median increase in the past year for total guaranteed remuneration for executive directors of JSE-listed companies was between 6% and 8% – in line with or slightly higher than the inflation rate.

"This reflects the stringent economic conditions that businesses have faced," says Landelahni director Alan Witherden. "However, bonuses seem to be out of proportion and not commensurate with responsibility and long-term achievement.

The new Companies Act and King III have increased the say of shareholders on how the board rewards company executives, but it is still too early to tell whether this will address golden parachutes, guaranteed bonuses or pay for failure.

We have seen some cases of deferred pay and bonuses as a consequence of non-performance. The question is why is the board awarding them in the first place?

Business Unity SA recently announced it is compiling a code of conduct on remuneration and labour practices that will include 'sacrifices by management'. If management is performing above par, it should receive its due reward. However, if Busa's code of conduct establishes some benchmarks regarding remuneration, that could be very valuable.

In the face of growing scrutiny, transparency around reward policies – particularly in regard to awarding bonuses against performance – is critical.

Ultimately, remuneration levels are market related. Despite the recession, the global shortage of highly-skilled leaders is driving up demand. We are looking at an international market where pay levels far exceed those in South Africa. Let's not drive away SA's scarce leaders and curtail our ability to attract the best talent by putting an artificial cap on earnings.

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The SA Leader Magazine


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