A performance that almost defies logic

The 180th anniversary of First National Bank (FNB) revealed the financial partner of millions of South Africans to be in its strongest shape yet.

Its performance has provided a tide in which all boats in the group could rise, allowing FirstRand (under new CEO Alan Pullinger) to deliver earnings and dividend growth of 8% to R4.70 and R2.75 respectively for the 12 months to June.

FNB, under CEO Jacques Celliers, grew its normalised earnings 16% to R14.8bn and now accounts for 57% of the group’s earnings.

Its return on equity for the year came to a spectacular 40%. Imagine that — for every R1 of equity FirstRand puts into that business, it gets 40c back within 12 months.

What’s even more impressive is that FNB achieved this when, for half of the reporting period, SA was in recession. It almost defies logic.

While Pullinger is a seasoned investment banker — he led Rand Merchant Bank (RMB) for a number of years — his first assignment as FirstRand chief was to understand the power of retail banking: FNB. He probably won’t find many better models in the world.

As Celliers points out, these results were the fruits of initiatives and strategies sown many years ago. “It’s tough out there. Our strategies are sound and consistent and show that we can make money in tough times,” he says.

What is this strategy? “It revolves around the primary bank relationship,” says Pullinger.

“We have people coming to our digital channels every day to transact. Every time they transact there is a chance for us to interact with them. When they do that we generate data and learn about them and this is what drives this Amazon platform thinking, where we can begin to offer tailored services and products at the appropriate times.”

It appears the strategy is still in its infancy.

Patrice Rassou, head of equities at Sanlam Investment Management, thinks FNB’s performance was phenomenal. “They are gaining customers across the board. Despite their saying they are cautious, it belies what is going on beneath. Card’s lending book was up 24%, while personal loans rose 46%. It’s big numbers at a targeted client base.”

RMB was a tale of two geographies. The SA unit grew profit before tax by 2% to R8.6bn while the rest of Africa grew by 31% to R1.7bn, which meant that overall the investment and corporate banking franchise grew earnings broadly in line with inflation at 6%.

WesBank is having a tough time. The motor vehicle finance arm saw earnings fall by 9% to R3.6bn while return on equity fell to 17.4%. In a fairly stagnant market, WesBank had competitive pressures affecting its margins. It also had problems with its credit scoring. “We had data we were using in our scorecards [that are used to determine the amount and price of credit extended] that were problematic and we

picked up the problem too late,” says Pullinger.

Additional problems arose in client repossessions, where owners of cars in default forced the bank to obtain court orders before it could repossess. This increased the time and cost involved in taking vehicles back.

Similarly, the performance of MotoNovo — the UK equivalent of WesBank — saw earnings before tax decline 15% in sterling terms. Part of the reason for this was higher funding costs, which hit competitiveness. FirstRand thinks its recent acquisition of Aldermore Bank in the UK can add value to MotoNovo by helping to lower the cost of funding.

There are not many places to hide in the retail arena on the JSE at the moment, but FNB — through FirstRand — is definitely one of them. The market expects the group to grow earnings by 10% in the year ahead. The premium certainly looks justified.