The midyear results from the banks and insurance companies are imminent. All the big four banks will announce results to June 30 — interims for Standard Bank, Nedbank and Absa, and finals for FirstRand.
The trading updates are not exciting, telling the market to expect either low-single-digit earnings increases, or in the case of Absa, “mid-teen earnings growth”.
Uncertainty in the global economy has increased since Donald Trump’s inauguration as US president in January, with his on again-off again tariffs. This makes it difficult for corporates to commit to new projects. And since Capitec has forced the big four to cut their fees to the bone in the retail market, business and corporate banking are their main growth drivers, with business outside SA, where Capitec doesn’t operate.
FirstRand is still undoubtedly the best-quality bank in the big four. It has been conservative when it comes to growing its loan book, which is the highest quality in the pack. By contrast, Absa has been more aggressive regarding increasing market share. It is still catching up from the era when it was controlled from London by Barclays, which had very tight rules about loans, even low-risk home loans.
The fly in the ointment for FirstRand is the potential exposure from its UK motor business. The UK Supreme Court will rule any day now on the MotoNovo case about the disclosure of commissions for motor finance. This could have a material effect on the profits of FirstRand’s UK subsidiary, Aldermore Bank. But FirstRand is likely to have the best return on equity and the highest increase in earnings per share in its peer group of mature banks.
There have been management changes at all the big banks except for Standard Bank, which has raised the retirement age to 63. This will allow CEO Sim Tshabalala to stay for a further five years if he wants to. He needs time to groom a successor after the sudden departure of his deputy, Kenny Fihla, to Absa.
Fihla is a corporate banker, so he will need to build a strong team of retail bankers around him given that the SA retail bank accounts for 60% of group earnings. And he will certainly have to clamp down on the backbiting and intrigue that led to the early retirement of his predecessor, Arrie Rautenbach. He will need to bring in a zero tolerance approach to executives leaking rumours to the media. There is already a serious investigation to weed out those miscreants.
Absa built up a culture in which senior executives ran their own fiefdom, particularly during the constitutional monarchy of nonbanker Maria Ramos in 2009-19. Fihla will need to crack the whip.
There are heavy hints that the Absa domestic retail bank will be reunited, as the division between everyday banking (transactional accounts), product (home loans and vehicle finance) and relationship banking (private and business banking), was not working. Clients need a central point of contact, as former Absa interim CEO Charles Russon recently told the Financial Mail.
Absa is certainly a bargain on a 6.8 price-earnings (PE) ratio — it was even lower at times before Fihla’s hire. Even though its return on equity is mediocre compared with its peers, Absa has a credible balance sheet and no shortage of competent management. Without Fihla’s appointment Absa could have been in deep trouble. The market was fed up with its revolving door of CEOs. Fihla’s hire certainly took investors by surprise. Just a few days before he was still answering media questions about Standard Bank’s results.
In contrast to Absa, there has been stability at Nedbank with Mike Brown having been CEO for 14 years, and by all accounts a seamless transition to Jason Quinn in May 2024. Though it’s hard to confirm it from the outside, Quinn seems popular with the management team. He recruited Andiswa Bata from FNB to run the newly created business and commercial banking cluster — a coup given that FNB remains the market leader. Still in her early 40s, she is well placed to be the next Nedbank CEO.
It looks as though Quinn will tidy up the Nedbank portfolio by selling its 20% holding in Ecobank, which operates in West Africa. Nedbank doesn’t control the business so it makes sense to redeploy the funds into businesses in which it does have management control. With a PE of 7.6, Nedbank is not on a very demanding premium to the far more chaotic and unreliable Absa.
Under Brown Nedbank never overpromised to the market. It nearly went under twice, in 1985 and 2004, in both cases because of forays outside its comfort zone into global markets, and both times Old Mutual rescued it. Nedbank no longer has that safety net after the managed separation from Old Mutual in 2018, and there is every indication that Quinn will follow Brown’s cautious approach.
Old Mutual is also reporting on its six months to June soon, but the new CEO, Jurie Strydom, has been in the hot seat for just a few weeks. It looks cheap at a 6.6 PE, but much like Absa it has also disappointed the market. It didn’t help that there was a protracted battle with Peter Moyo, its first CEO since the head office moved back from London in 2018.
It has battled much strengthened competition not just from Sanlam but Momentum and Discovery. Even Liberty, now wholly owned by Standard Bank, still puts up a fight.
• Cranston is a former associate editor of the Financial Mail.
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