FirstRand, the group that owns FNB, WesBank and Rand Merchant Bank (RMB), says its finances are holding up even though it expects SA’s economy to contract slightly in 2023.
The financial services conglomerate said in a Wednesday trading update for the year to end-June that it still expects to deliver underlying earnings growth as advised when it published its interim results in March. Despite a macroeconomic backdrop characterised by stubborn inflation, rising interest rates and negative market reaction to SA’s stance on the Russia-Ukraine conflict, FirstRand said its return on equity (ROE) should remain at the upper end of its expected range of 18% to 22%.
“The group believes that this is a highly commendable performance and is due to the resilience of its customer-facing businesses, ongoing positive momentum in its deposit gathering activities and the group’s disciplined allocation of financial resources, in particular its targeted origination strategy adopted during 2021 and early 2022,” FirstRand said in the voluntary trading update.
Nevertheless, the group lowered its 2023 GDP forecast for SA to a contraction of 0.1%, adding that it believes there is a strong likelihood of further rate hikes despite higher levels of load-shedding and the effect of higher borrowing costs on consumers.
Yet while rate hikes have resulted in more expensive loan repayments for consumers, they have benefited FirstRand’s banking operations by boosting the group’s net interest income (NII) — the difference between what it charges clients for loans versus what it pays depositors. That phenomenon is known in the banking industry as the positive endowment effect.
While FirstRand’s cost of funding rose as customers migrated to higher-yielding depositor products and higher rates made sourcing capital in institutional markets more expensive, the group’s NII still benefited from continued loan growth.
In SA it said this growth in loans mainly emanated from retail vehicle and asset finance and strong demand from commercial and corporate clients, which suggests private sector investment remained resilient in certain sectors.
The group’s non-interest revenue (NIR) growth was slightly ahead of management’s expectations, especially at FNB which saw increases in fee and commission income coupled with good customer growth. Insurance revenue, including some reserve releases from an improved claims experience, also contributed positively to FirstRand’s results.
RMB, the group’s investment banking business, saw growth in customers though its markets trading unit was negatively affected in the second half by market volatility.
FirstRand’s operations in the UK, where it owns SME-focused lender Aldermore and vehicle financier MotoNovo, saw loan growth slow in the second half for both residential mortgages and retail vehicle and asset finance.
“In the UK operations there is no indication of greater strain than predicted,” FirstRand said. “Household affordability has held up well so far. However, the repricing of the fixed-rate mortgages book commenced in the second half, and the consequences of higher interest rates will continue to weigh on the credit portfolios.”
The group said its costs continue to trend significantly higher than inflation mainly due to increased incentives for improved staff performance, increased foreign currency-based expenditure, headcount expansion and what it termed the “normalisation” of marketing and travel costs.
Even so, it said it expects its cost-to-income ratio for its 2023 financial year to be more or less in line with that of the prior year.
Despite the deterioration in SA’s economy FirstRand said it expects its credit loss ratio for the year to remain below its stated through-the-cycle range, thanks partly to its cautious approach to loan origination.
“Provisioning and coverage levels remain appropriately struck,” FirstRand said. “Across the group, the collections teams have performed extremely well in difficult circumstances. The group’s capital and liquidity levels remain strong and above internal targets.”
FirstRand is scheduled to publish its results on September 14.
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