It’s not clear what SA gains from being in Brics, and the addition of new members to the bloc has raised questions whether SA is serious about the greylist on which the Financial Action Task Force (FATF) placed it in February, says the CEO of SA’s most valuable banking group.
“If you stand back and look at it through hard economic eyes, I’m not sure the Brics construct makes a ton of sense for us,” FirstRand CEO Alan Pullinger said on Thursday. He added he was concerned that SA’s reputation as an investible economy is sliding and pointed out that one of the bloc’s new members, Iran, has been blacklisted by the FATF while another, the UAE, is also on the greylist.
Pullinger was speaking during an interview after FirstRand reported a 12% increase in earnings for the year to June, leading its peers in the sector with a return on equity of 21.2% and a bad debt ratio of 78 basis points, which was at the bottom end of its target range despite the past year’s rapid rise in interest rates.
The FirstRand share price fell 3% after the release of the results. Pullinger said the group has been deliberate in positioning a subdued outlook. “We’ve been at pains to say that the next 12 months are going to be tough. We’ll be able to grow profits but we really are starting to feel a slowdown in momentum,” Pullinger told Business Day. The consumer is under pressure and this is showing up particularly in mortgage and vehicle finance applications and approval rates.
But FirstRand has been “lucky perhaps” in its credit loss experience, Pullinger said, because it has been discerning about granting credit coming out of the Covid-19 pandemic two years ago, even before the sharp spikes in inflation and interest rates experts had not predicted.
Russia
Pullinger expressed concern at the time of the group’s interim results about the negative consequences for trade and investment of the government’s open support for Russia, saying “FirstRand does not share the government’s enthusiasm for Russia”.
He said on Thursday the Russia story has thankfully calmed, and that the Brics summit has come and gone, which was a good story. But he said SA’s membership raises questions about the friends it keeps and its support for the addition of new members “seems to show at a general government level (excluding the Treasury and Reserve Bank) that ... people aren’t prepared to do the hard yards to get us off the greylist.”
The Treasury said the government is meeting with the FATF this week for a progress update on the 22 actions SA has to take to get itself off the greylist. February’s greylisting has contributed to driving up the country’s risk premium and has meant more cumbersome compliance procedures for banks dealing with foreign counterparties, as well as raising the risk that SA could be excluded from key global clearing and settlement platforms.
The group’s credit loss ratio increased from 56 basis points to 78 basis points but this was still at or below the bottom end of its through-the-cycle target range. Pullinger said the credit loss ratio was mainly the consequence of business written in the past, particularly in the past two years and the group has been lucky in that it never believed it was back to business as usual coming out of the Covid shock.
“It’s taken us a long, long time to really shake off the effects of Covid. I don’t think we’ve normalised. So we were very discerning on lending. We didn’t know at the time that we were going to go into this massive inflation and interest rate spike in the world, but that is what played out and we are thankful that we didn’t write business into that environment,” Pullinger said.
FirstRand’s rivals Standard Bank and Absa saw their banking operations in the rest of Africa drive up earnings while their SA operations performed less well. Pullinger said the rest of Africa is only 10% of FirstRand’s portfolio but operations showed the group’s fastest pretax profit growth at 32%.
The group increased net interest income 16%, driven by growth of 15% in its core lending book as well as by growth in its deposit base and higher interest rates. Noninterest revenue was up 11%. Of the group’s businesses, FNB delivered pretax profit growth of 12% and a return on equity of almost 42% while Wesbank’s pretax profit was up 16%, RMB 12% and UK’s Aldermore and MotoNovo 6%.
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