Firstrand: best of a bad bunch
The bank has set aside more than its peers for bad debts, hitting earnings. But analysts say it’s a good call
I am confident that Firstrand’s loan book, with a provision this large, is well provided for; I am not sure about the others
For the first time since the 2008 global financial crisis, Firstrand has made an economic loss — of R1.4bn.
The last of the big four banks to report results to June, Firstrand experienced the same stresses as its peers as Covid-19 suddenly ended one of the most benign periods for bad debts in recent history.
Unlike its peers, Firstrand measures its performance in “economic profit”, or net income after the cost of capital. This might seem to be a common-sense definition of profit, but it is widely ignored by Firstrand’s competitors.
CEO Alan Pullinger says the effects of Covid-19 hit hard in the second half of the financial year, with earnings, at R3.25bn, down 78% from the same period in the previous year. The main culprit is higher impairment charges.
“We had been seeing our impairments grow by about 8% every six months, which we can expect so long as our book keeps growing. But in the second half they leapt from R5.93bn to R18.5bn.”
Firstrand’s credit loss ratio of 1.91% is higher than Standard Bank’s 1.77% and not far off Nedbank’s 1.96%. Pullinger says a fairer peer comparison is the second-half figure, which came in at 2.87% — even above Absa.
But playing safe may pay off.
Coronation Financial fund manager Neill Young says: “I am confident that Firstrand’s loan book, with a provision this large, is well provided for; I am not sure about the others.”
Pullinger says only 63% of the credit loss charge can be attributed to nonperforming loans and writeoffs — known under International Financial Reporting Standards as stage 3 loans.
About one-fifth is ascribed to macroeconomic changes, with 9% of the impairment figure allocated to changes in the quality of corporate bonds.
There is also a provision — 7% of the total — for the impact of the Covid-19 debt relief programme. “Instead of a payment holiday we decided to offer a special loan account at prime, which is a more flexible arrangement,” says Pullinger.
In all, Firstrand CFO Harry Kellan says impairments accounted for more than 90% of the decline in earnings. The other main factors were the decline in transactional income and an increase in operating costs.
Firstrand’s corporate unit, Rand Merchant Bank (RMB), which had a benign 0.12% credit loss in 2019, saw this jump to 0.94%.
Pullinger points out that income at RMB fell in all divisions except markets and structuring, which handles currency and commodity trading — its income grew 21% to R2.4bn.
The division’s income was up twothirds in the rest of Africa, driven by trading activities in Nigeria.
While retail bank FNB’S credit loss ratio doubled, it also continued to grow loans and advances, to R477bn.
FNB now includes the Directaxis personal loans business previously housed in Wesbank, while Wesbank is now in effect a monoline vehicle finance provider.
Unsurprisingly, it struggled with normalised earnings down 53% to R843m. Prior to the lockdown, however, it was starting to originate better-quality business.
But the case for keeping Wesbank separate from
FNB gets weaker every year.
FNB under Jacques Celliers has retained the innovative approach pioneered by his predecessor, Michael Jordaan.
Neill Young