FirstRand has seen its steady-as-she-goes lending strategy pay off, as its focus on lending only to low and medium risk customers in retail and commercial banking pays off in a market that remains difficult despite interest rate cuts.
But CEO Mary Vilakazi says it has been sympathetic to charges that SA’s banks don’t do enough lending to small and medium enterprises and it has started working with development finance institutions to enable it to lend to businesses that may not have the collateral or regular cash flows the bank would typically require.
The group’s First National Bank continues to be the largest lender into the SME market, with a book of almost R52bn.
The group, which is SA’s largest by market value, posted earnings growth of 10% in the six months to end-December as it benefited from improved operating performance and better than expected credit drivers.
Vilakazi said retail credit losses had now peaked, and were trending down faster than the group had expected. She expects earnings to be higher in the second half of the year than in the first.
The group expects earnings growth to be one to three percentage points higher than nominal GDP growth over the long term. And its cost to income ratio, at 48.9%, is now the lowest of SA’s big banks.
The group tilted to focus on lending to low and medium-risk customers as the economy started coming out of the Covid-19 shock in 2021, and has stuck to that consistently, which means it doesn’t chase market share when times are good but also doesn’t have to pull back when times get tough.
The result is its bad debts have been steadier than some of its competitors through the heights of the interest rate cycle.
“It doesn’t look like you get rewarded actually for lending to people that can’t pay,” Vilakazi said in an interview. “There’s a reason why customers end up in that high risk category, because generally they are overindebted, or have defaulted on debt before.”
The result is its credit loss ratio has remained below the midpoint of its through-the-cycle target range of 80-110 basis points throughout the recent cycle, in contrast to some of its competitors which have breached the top of their target ranges.
FirstRand’s credit loss ratio fell to 84 basis points in the latest six months, after peaking at 92.
“We probably had a smoother experience than peers who pulled out when interest rates were going up and credit losses started to build. We just said where are the low- to medium risk customers, and if they have affordability we continue,” she said, though she noted that when the economy came under pressure the number of customers with affordability tended to fall, so lending was lower.
But though the group is careful not to lend into highly indebted individual households that can’t afford it, Vilakazi said as a sector SA banks needed to do more to lend to small businesses. It still had to be prudent, but has started looking beyond traditional criteria to other risk mitigants and is working with the likes of the International Finance Corporation and European development banks that can take the first loss and so unlock more capacity for the bank to lend to SMEs, Vilakazi said.
The group’s prospects are somewhat overshadowed by the issues its Aldermore business in the UK faces over commissions historically in its motor finance business.
It has appealed to the UK supreme court and expects the case to come to court from April 1-3. It had set aside a contingency of R3bn against regulatory action by the UK Financial Conduct Authority though it hopes that a remediation process will be possible that will provide customers with redress, Vilakazi said.
Standard Bank and Absa are due to report their full year results next week, completing the round of big four bank results. Nedbank this week reported an 8% increase in earnings.
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