Old Mutual comes to aid of banking arm

Old Mutual said yesterday it would try to save its troubled banking arm through a 5 billion South African rand (£400m) rights issue, wrong-footing shareholders who had expected the insurer to cut its losses and sell the ailing Nedcor.

"We have grasped the nettle of Nedcor. It is undercapitalised and we are determined to go through with a restructuring plan that we are confident we can deliver," Julian Roberts, the finance director of Old Mutual, said as the group revealed a 10 per cent drop in annual profits to £650m as a result of problems at Nedcor.

Nedcor has struggled with the strengthening rand, as most of its assets were held in the US. As the rand rose, the value of its international portfolio shrank. It also called US interest rates wrong, locking in to high fixed rates for debts and deposits that became expensive as interest rates fell. Costs arising from its merger with smaller rival BoE have also spiralled.

Old Mutual, which is listed in London and owns 52 per cent of Nedcor, plans to take up R2.5bn of shares in the R5bn on offer as a means of increasing its stake to up to 70 per cent. It has also underwritten 76 per cent of the issue.

Some in the City welcomed yesterday's decision to back Nedcor and increase its stake in the business. But there are still concerns that the bank will remain a drag on its performance and the additional capital injection will not be enough to pull it through.

"Nedcor is an important part of the Old Mutual group and we have no intention of selling our stake," Mr Roberts said. Some of the proceeds would be used to repay a R2bn loan from Old Mutual to Nedcor in December.

The insurer said the move to underpin the rights issue at Nedcor, however, would not dent its capital position and that it was still looking for an acquisition in the UK. The company is keen to boost its presence in the UK life insurance sector and is thought to have circled a number of companies, such as the Britannic Group and HHG, spun off from AMP.

The group said life sales dropped 5 per cent to £529m due to lower consumer confidence in South Africa and softer US demand for fixed-income products.