Sanlam Private Wealth says based on its projections SA’s most valuable banking group, FirstRand, is likely to sustain returns in the vicinity of 20% in the coming years.
Gary Davids, an investment analyst at Sanlam Private Wealth, said recently FirstRand offered a compelling mix of stability, growth potential and attractive returns, which made it a valuable addition to any diversified portfolio.
“Given the prevailing expectation of a downward trajectory in interest rates over the coming year, FirstRand has now also emerged as an attractive investment. Unlike its competitors, FirstRand has limited earnings sensitivity to interest rate cuts, resulting in a more stable net interest margin,” Davids said.
“While others may have done better during the period of rising interest rates, the current environment positions FirstRand advantageously. We estimate that (all things being equal) a 1% cut in interest rates could see FirstRand’s headline earnings fall by only 2%, compared with 7% for Nedbank and 4.5% for Standard Bank,” he said.
“Moreover, the group maintains a robust capital position, boasting a common equity tier 1 ratio of 13.2%, comfortably above both internal targets and the 9% regulatory minimum set by the SA Reserve Bank. This surplus capital serves as a protective buffer against unforeseen losses or economic downturns.”
FirstRand’s portfolio of businesses comprises RMB, First National Bank (FNB), WesBank, Aldermore Bank and Ashburton Investments.
The group, worth about R385bn on the JSE, has recently undergone a leadership overhaul, with Mary Vilakazi taking over from Alan Pullinger, who stepped down in April.
The banking major also has a new CFO in Markos Davias, whose most recent role was FNB’s CFO. The group’s erstwhile CEO, Johan Burger, has taken over from Roger Jardine as FirstRand’s chair.
FirstRand reported return on equity of 20.6% in the six months to end-December, and a 6% rise in profit to R19.1bn in the period.
The lender had a better-than-expected credit performance, with the credit loss ratio well below the midpoint of the so-called through-the-cycle range of 80-110 basis points (bps).
The overall credit loss ratio, a measure of bad loans as a percentage of total loans, rose to 83 bps from 74, with increases across all portfolios except its broader Africa and UK operations.
FirstRand said the benign credit loss ratio reflected the benefit of its approach to origination, especially since the pandemic when new business was weighted towards the low- and medium-risk categories.
Sanlam Private Wealth said FirstRand’s growth trajectory would be underpinned by expanding loan growth, as well as cross-selling and upselling opportunities, particularly FNB products such as insurance, to its 11-million customers.
“While high capital levels are not exclusive to FirstRand, the institution stands out as a deposit-taking bank with a notably low loan-to-deposit ratio. This robust financial standing not only allows FirstRand to maintain stability but also presents opportunities for growth,” Davids said.
“Specifically, during periods when other banks are tightening their lending criteria, FirstRand can leverage its strong capital position to increase its lending activities and further solidify its market share. Importantly, due to its healthy balance sheet, FirstRand does not find itself compelled to engage in aggressive deposit acquisition tactics to fuel its business growth.”
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