FirstRand ekes out growth as rivals battle

FirstRand, the country’s largest banking group by market capitalisation, continues to grow ahead of the market, despite macroeconomic environments in South Africa and the United Kingdom remaining “challenging”.

Overall, normalised headline earnings per share for the six months to end-December is up 5% (versus full-year growth of 1% at Standard Bank Group and a decline of 6.3% at Nedbank Group), with increases across its three main franchises: FNB, RMB and Wesbank.

Growth at FNB, which comprises nearly a third of the group’s earnings, was driven by its Commercial (business bank) and Rest of Africa units, where pre-tax profit was up by 9% and 7% respectively. The Retail unit grew profit by just 3%.

It conceded over R270 million in fees, primarily via targeted cuts in its July annual pricing review, but growth in non-interest revenue remained buoyant at 7%. These decreases were part of “ongoing and pre-emptive strategies” as “competition increases”.

Read: FNB cuts and simplifies (most) fees

FNB CEO Jacques Celliers says the simplification and adjustments over the past number of years has “played out quite well, especially in the bottom end of the market”.

“There are still one or two adjustments to do, but we believe we have a very competitive pricing proposition.”

The banking landscape has intensified significantly in the past 18 months, with the entry of TymeBank, African Bank’s shift into transactional banking, and the launch of Discovery Bank last year. Bank Zero is expected to enter the market this year.

Read: Banks freeze, cut entry-level fees

The impact of this is evident in FNB’s customer numbers. While total customers are up 1%, those in the mass market (its Consumer segment) are down by 3%. Some of these have shifted up into the Premium segment, with half of the 15% growth of this base attributable to upward migration.

This is normal behaviour, contends Celliers: “New-to-bank customers typically opt for the most basic offering to test us out.”

Its entire eBucks rewards programme is premised on driving behaviour change as customers use multiple products, and it is this that helps drive this strong move upward.

Advances growth (year-on-year)	Premium	Consumer
Residential mortgages	+7%	+3%
Card	+28%	-5%
Personal loans	+30%	+7%
Retail other	+9%	-3%

The bank has in recent years chosen not to be aggressive on credit at all in the lower end of the market. “Arguably, this leaves the bank with a bit of exposure [to the competitive landscape] at the bottom end of the market,” says Celliers.

Across the rolling six months to the end of 2019, personal loans advances were flat in the consumer segment. In the premium segment, advances growth was 6%. However, this has decelerated sharply from levels of between 22% and 33% over the prior three half-year periods.

The bank says the macroeconomic environment deteriorated more rapidly than anticipated, particularly in late 2019. The bank had to seemingly play catch up to this rapid change, with the result being a “marginally weaker” credit performance than expected.

Credit loss ratio	December 2018	December 2019
FNB Retail	1.73	2.11
• Residential mortgages	0.09	0.22
• Card	2.93	4.25
• Personal loans*	7.74	8.29
• Retail other	8.31	8.12
FNB Commercial	0.78	1.11
FNB (including Rest of Africa)	1.50	1.82
Wesbank	1.25	1.27
RMB	0.14	0.07
Aldermore	0.23	0.46
FirstRand Group	0.86	0.95
Credit loss ratio, excluding Aldemore	0.96	1.05

* Including slightly poorer quality DirectAxis book, now part of FNB (previously Wesbank).

Overall balance sheet provisions increased by 7%. This translated into a R910 million increase in the group’s credit charge. Card impairments increased by R270 million on the back of an increase in advances, however “strong book growth from new-to-bank and new-to-product origination strategies in the year to June 2019” resulted in “specific origination issues”. Non-performing loans caused by this will continue to remain elevated for the rest of the year. The bank sees “pressures in collections” on personal loans, resulting in an additional R300 million provision.

Group advances for the six months were up 4%, while deposits grew by 7%. (Normalised) return on equity of 21.2% is lower than the 22.3% achieved a year ago.

The group says it expects the macro picture to “continue to deteriorate, probably at a faster rate than the first half”. The global Covid-19 outbreak will continue to disrupt economic activity and “weaker wage growth” in the local context will translate into “weaker consumer spending”. FirstRand says it “has already experienced a material slowdown in its domestic business since the beginning of 2020”. It adds it will not achieve its stated target of real growth (GDP+CPI) in earnings for the full year, but earnings “are expected to reflect growth”.