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- SA's largest bank by market value FirstRand has upped its earnings and dividend by double digits in its year to end-June, helped by a growing loan book.
- Loan origination is back to pre-pandemic levels, and the group says its credit performance has been healthy despite unexpectedly high inflation and interest rates.
- But the group is cautious about the outlook for SA, saying while interest rates have probably peaked, they may only start falling in mid 2024.
- For more financial news, go to the News24 Business front page.
FirstRand, SA’s largest banking group by market value, raised its dividend by double digits after reporting robust annual results on the back of a solid operational performance.
The Johannesburg-headquartered group said normalised earnings attributable to ordinary shareholders rose 12% to R36.7 billion for the year to end June, allowing its board to declare an annual dividend of 384c, a 12% year-on-year increase.
The group, which is valued at R384 billion on the JSE, said its results reflected the quality and resilience of its underlying businesses, which include FNB, RMB, WesBank and Aldermore in the UK.
FirstRand’s overall credit loss ratio of 78 basis points for the period, which though higher than the 56 basis points reported the previous year, remained below the group’s through-the-cycle range. The group’s return on equity (ROE) came in at 21.2%, staying at the upper end of its 18% to 22% target.
FirstRand CEO Pullinger told News24 the group’s relatively contained credit losses, given the tough operating environment, were due to its decision to tighten lending criteria in the wake of Covid-19 by curbing loans to higher risk customers.
“We anchored the thesis on saying that coming out Covid-19 it’s not going to be business as usual. Households and small businesses were damaged, so we knew we had to be super careful,” said Pullinger.
“What’s transpired is that interest rates have risen much higher than we thought right around the world. “We also tried to favour secure lending – which is really vehicle and home finance. We didn’t want to push unsecure lending like personal loans, credit cards, temporary loans…and it’s really played out well for us.”
FirstRand’s results come at a time when most of its retail banking rivals are seeing higher impairments as customers struggle to make loan repayments due to surging food and fuel costs that have driven interest rates to their highest since 2009. The Reserve Bank has hiked its benchmark lending rate by 475 basis points (bps) since it began tightening monetary policy in November 2021 in an attempt to curb inflation, which only fell back within its 3% to 6% tolerance range in June after remaining above target for 13 consecutive months.
Despite FirstRand saying the current interest rate and inflation cycle has been more aggressive than it initially expected, it has still gradually increased loan origination over the past 18-months back to pre-pandemic levels. Though the group’s credit loss ratio remains within acceptable levels, bad loans have still increased, driven by its retail-focused operations in SA as well as its UK businesses.
Lending pressure
The group’s stage 3 non-performing loans (NPLs), which are typically defined as those that are more than 90 days in arrears, increased to R57.4 billion in the financial year, up from R50.9 billion the prior year. However, these still only constituted 3.8% of FirstRand’s core lending advances in the period, down from 3.88% in the previous financial year, underscoring the resilience of the group’s operations in the face of severe consumer headwinds.
FNB’s credit impairment charge increased 37% to R6.74 billion with the retail lender’s credit loss ratio rising to 132 basis points, from 104 basis points. This was largely due to growth in loans and the consequent increase in arrears in its retail personal loans, card and overdrafts portfolios, though FirstRand said this was in line with historical trends.
Non-performing loans at FNB climbed to 6.59% of total advances, up from 6.45% the previous year, though this was partly offset by robust collection efforts across all its lending portfolios. Even so, FNB remained the star performer in the FirstRand stable by contributing 60%, or R21.9 billion, of the group's R36.7 billion normalised earnings.
Vehicle financing unit WesBank contributed 5% or R1.86 billion to the group’s normalised earnings, a 16% improvement thanks to robust auto sales. Nevertheless, FirstRand warned that market activity at WesBank slowed down in the second half of the financial year, as customers struggled with affordability due to inflationary and interest rate pressures.
RMB, the group’s corporate and investment banking unit, headed up by Emrie Brown, accounted for 25%, or R9.15 billion, of the group’s normalised earnings thanks to a strong performance from its Africa portfolio, which mitigated a softer performance from its South African operations due to higher credit provisions, a weaker performance in its financial markets trading activities and above-inflation staff cost increases.
The investment banking unit’s total profit before tax rose 9% in the year to R12.6 billion; however, on a segmental basis its SA arm saw after-tax profit drop 4% to about R8.7 billion. By contrast, RMB’s broader African business shot the lights out with a 55% jump in after-tax profit to R3.95 billion.
FirstRand’s UK operations, which include Aldermore Bank and vehicle financier MotoNovo, contributed about 9% or R3.35 billion to normalised earnings. Despite a challenging macroeconomic backdrop in the UK, characterised by strong inflationary pressures, the businesses still delivered profit growth while overall advances grew 2% to £15.6 billion (R368 billion). However, FirstRand still had to book an impairment charge of £90.4 million for the UK business, an increase of 57% on the prior year, though it said this was in line with its expectations given the uncertain economic outlook in the UK.
Looking ahead
FNB’s wealth and investment business, which covers everything from retirement annuities to wealth management for high-net worth clients, increased assets by 12% to R320 billion in the year. FNB CEO Jacques Celliers said the big opportunities to continue growing the wealth management offering by integrating it into its banking operations.
He was also particularly excited by Guernsey, where FNB has a presence, as the bank is seeing strong demand from what he called “global citizens” looking to externalise their wealth.
Despite FirstRand’s solid performance in the past financial year, Pullinger struck a cautious tone on the year ahead, saying uncertainty remains high. While he believes interest rates and SA and other African jurisdictions where the group operates have probably peaked, FirstRand only expects borrowing costs to start falling in mid-2024 while in the UK rates are likely to rise further.
"This environment means corporate advances growth will moderate from current levels but are expected to remain resilient. Retail portfolios probably soften on the back of lower demand," Pullinger said. "The group’s credit loss ratio in the coming year is expected to marginally exceed the mid-point of the through-the-cycle range, which is a pleasing performance given the strain consumers and households are feeling at the moment."
FirstRand's shares were down more than 3% in midday trade on Thursday but are still about 10% for the year to date.
Update: This article has been updated with additional comments from FirstRand's executives.
