FirstRand delivered an impressive set of annual results, though closer inspection also revealed that one of SA’s most valuable blue-chip financial services groups is still struggling to shake off the damage wrought by Covid-19.
The group, whose underlying assets include FNB, Rand Merchant Bank and WesBank, delivered a 54% jump in normalised earnings, a metric that removes the effect of one-off items or seasonality, and came in at R26.55bn for the year ended June.
However, that was largely due to much of the previous financial year falling into the most stringent period of SA’s first pandemic-induced hard lockdown that started in March 2020. Total provisions for stage one, two and three non-performing loans increased by 3% from the previous year to R50.62bn, which FirstRand said reflected its “prudent” impairment coverage.
“The level of improvement in the group’s performance demonstrates the quality of FirstRand’s portfolio of businesses and their ability to capitalise on the economic rebound that is taking place,” said Alan Pullinger, CEO of FirstRand, which is Africa’s biggest banking group by market value.
“Although much of this growth can be ascribed to the prior year’s base effect, due to increased impairments raised for the impact of the Covid-19 pandemic, the group’s current year pre-provision operating profit, which excludes impairments, increased 5%, a pleasing outcome given the tough operating environment.”
The impact of that so-called base effect, which occurs when a financial data point recovers strongly from a previous period of underperformance, is perhaps best illustrated by comparing FirstRand’s current fiscal year results with its pre-pandemic performance. That analysis shows normalised earnings are still down 4.8% from the R27.89bn reported in the 2019 fiscal year.
Nevertheless, that’s perfectly understandable given that SA’s economy shrank 6.4% and shed more than 1-million jobs in 2020 as Covid-19 and related lockdowns forced businesses to shutter operations for months. Given the dreadful economic backdrop that arose, FirstRand’s performance is still admirable.
“The resilience of customers given the economic fallout from Covid-19 proved to be better than expected and benefited from the temporary relief granted by banks, lower interest rates and the economic tailwind of commodity prices,” said Renier de Bruyn, senior investment analyst at Sanlam Private Wealth. “However, credit impairment cost remained above pre-Covid-19 levels and the provision on the balance sheet for future credit losses remains high as uncertainty over the sustainability of the economic recovery and the threat of further Covid-19 waves remain.”
FNB was the star performer in the group’s 2021 fiscal year, with its R16.28bn in normalised earnings up 33% from R12.23bn the previous year, and even beating its performance in 2019. It also accounted for 61% of the FirstRand group’s normalised earnings for the fiscal year.
RMB, the corporate and investment banking unit that now includes investment manager Ashburton’s results, delivered a 25% rise in normalised earnings to R7.07bn. WesBank’s performance was impressive with a 47% rise in normalised earnings to R1.23bn despite a challenging new car sales environment.
The performance of FirstRand’s UK operations, which include Aldermore Bank and vehicle financier MotoNovo, saw normalised earnings rise to R2.74bn.
“The group’s franchises appear to remain in good shape, with positive client growth and strong capital levels that position the group for future growth,” said De Bruyn.
Despite the bleak socioeconomic backdrop in SA, Pullinger still expects FirstRand’s resilient earnings recovery to continue, saying the second half of its 2021 fiscal year was the group’s highest six-month earnings level in its history.
“Our return on equity is expected to remain in the target range of 18%-22% and ongoing capital generation is likely to exceed demand in the current year,” said Pullinger. “We also expect to revert to our long-term target of delivering real [above inflation] growth in earnings.”
FirstRand’s strong underlying performance allowed its board of directors to declare a final dividend of 153c a share, taking its total gross cash dividend for the year to 263c per ordinary share.
The shares closed 2.9% lower at R59.82, leaving it with a 17.2% increase in 2021 so far.
Update: September 16 2021
This story has been updated to correct the percentage changes for FirstRand’s divisional performance.
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