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When a bank gets its mojo, it’s an impressive sight to watch. From the lows of 2008 when it was hit by massive offshore trading losses and a car wreck of a market for Wesbank and home loans, FirstRand now seems to be going from strength to strength.
The restructured and streamlined group is a pure banking play, with Momentum and OUTsurance following Discovery to their own destinies. Perhaps it is this focus that has allowed FirstRand to start lapping up market share while the other big banks are internally focused in slashing costs. Results earlier this month showed that all its franchises – FNB, FNB Africa, WesBank and RMB – achieved strong earnings performances. While other banks have had a decline in their gross advances, FirstRand edged up its lending by 7% and boosted net interest income by 9%.
What we like is that there was strong growth in higher-margin lending, especially in Wesbank. New vehicles sales were up 14,5% in the year to end-August, helping WesBank grow its advances by 12%. We also like a tilt towards highmargin asset lending while strictly managing profitability in mortgage lending. The strategy is working as the “new-look” banking group has an interest margin of 4,58%, significantly higher than its peers. The lower interest rate environment has been good for the quality of the book. Impairments have come down quite nicely towards average levels. Its impairment charge stood at 0,93%, ahead of most peers, while a 29% decrease in the impairment charge to R4,3bn helped boost earnings. The bank’s non-performing loans continue to fall and at 4,2%, though still high compared with the pre-2008 average, remain better than its competitors.
While the other banks have been backing off from the market, FNB has been marketing aggressively and pushing new products. Electronic and mobile banking offers the potential for new revenue streams.
While competition is heating up on the lower end of the market, FNB and its EasyPlan is upping the game. It has just over 4-million clients in the mass market and has grown its EasyPlan branches ahead of target, with 117 outlets now operating.
FirstRand is also making exciting moves in Africa. It is the only South African bank to have taken a greenfield approach, nurturing operations from scratch. That said, it is still interested in acquisitions, having pursued a Nigerian bank before walking away on price, and recently closing a deal to buy out a Zambian bank. Although the strategy requires patience, returns on equity from African operations can be mouthwatering, with FNB’s Botswana operation one of the most profitable anywhere on the continent. It is still targeting other fast-growth countries.
One small concern is that efficiency levels have remained sticky, with its cost-to-income ratio increasing marginally to 55,4% on the back of above-inflation salary increases and bonuses, though other operating cost growth is in support of business expansion. But FirstRand uses a slightly different methodology to calculate the ratio to its peers. On the same basis it would have been 53,3%, which leads the market. Our other concern applies to all the banks: the Eurozone debt crisis, weak house price growth and higher consumer debt in SA making it difficult to grow advances. But those headwinds are nothing new and FirstRand has proved it can sail into them. We’ve long been a fan of this bank, calling it the pick of the sector a year ago. With a PE ratio of 11,6, dividend yield of 3,9% and a clear bankingfocused model, we still reckon it is.
IM | September 28 – October 25 2011