FirstRand faces potential R13bn UK finance probe hit

Moody’s expects FirstRand’s liability over the UK probe into vehicle finance commissions to rise to as much as R13bn, about a third of the earnings the group reported in its last financial year, raising the stakes higher for the lender’s future in the UK market.

The ratings agency, however, said additional motor finance-related provisions would be manageable without weakening the group’s capital buffer.

Moody’s based its calculations on the proposed redress scheme by the Financial Conduct Authority (FCA), which estimates a total redress cost of £11bn.

“Banks had previously provisioned £2.2bn and hence are estimated to take an additional £3.4bn; three banks have already announced additional provisions of approximately £1.2bn after the FCA announcement,” the agency said in a note.

“To derive our estimate of FirstRand’s potential provisions of £500-£600m [R13bn], we assumed the group’s provisions will be proportionate to its 4%-5% market share of the FCA’s estimated redress costs of £11bn, or its provisioning coverage (to gross motor loans) will rise to around 15%, at the upper end of the range of its UK peers.”

The estimate by Moody’s comes as FirstRand, South Africa’s largest lender by market capitalisation, is still working towards a detailed assessment of the potential impact of the scheme.

The group, worth R532bn on the JSE, in November raised concern that the scheme “has moved materially beyond the group’s expectations of what can be considered proportionate or reasonable”, warning that the redress scheme would have a negative effect on the broader UK economy.

The Moody’s estimation is also a big leap from the provisions of £240m initially set aside by FirstRand.

The potential hit could place FirstRand at a strategic inflection point, as it would shave off a meaningful slice of its earnings and cut into capital for growth.

FirstRand CEO Mary Vilakazi told Bloomberg TV in January on the sidelines of World Economic Forum meetings in Davos that the group’s UK future hinges on the final outcome of the FCA’s processes.

“If a number of the substantive issues that we raised are not addressed, the amount that we are looking at is such that our business going forward is not going to have the capital resources that are needed to support lending in motors,” she told the news agency.

FirstRand’s UK motor finance company MotoNovo in 2024 resumed new business origination after a temporary halt while it updated its processes in response to an investigation by authorities on commission paid to dealers.

The FCA in October said it estimates consumers would receive about £700 per agreement, on average.

This was after the regulator found that motor finance companies broke laws and regulations in force at the time by failing to disclose important information to consumers, leading to unfairness as consumers were denied the chance to negotiate a better deal.

We believe the group could absorb such losses without significantly affecting its capital buffers, primarily through a lower dividend payout and/or other capital optimisation initiatives.

—  Moody’s

The probe found that in some instances, consumers ended up paying more for their loans. The FCA estimates that 44% of all motor finance agreements made since 2007 will be eligible for payout.

According to the FCA’s proposal, eligibility for the scheme would include motor finance agreements dating from April 6 2007 to November 1 2024, where a commission was paid by the lender to the broker.

Moody’s said additional provisioning needs would account for 10%-14% of FirstRand’s pretax profit for the fiscal year ending June 30 2025.

“We believe the group could absorb such losses without significantly affecting its capital buffers, primarily through a lower dividend payout and/or other capital optimisation initiatives.

“However, management is of the view that the current proposed scheme is beyond what can be considered proportionate or reasonable and believes the final outcome will result in a more proportionate redress scheme. This expectation implies that any additional provisions would be lower than our current scenario, which is based on the FCA’s consultation.”