Is the FirstRand share price reflecting pessimism around the departure of Michael Jordaan? The share is down 13% since the beginning of May and the slide has been amplified since the outgoing FNB CEO announced on 20th of that month that he would be leaving at the end of year, handing over the reins to the lesser-known Jacques Cilliers.
Jordaan’s departure announcement was well executed, with the appropriate assurances that the board had agreed to a threeyear business plan, that budgets were in place and that the management team behind Jordaan remained intact with a solid innovation pipeline in place. The share price however is reflecting some concern about a FirstRand future without Jordaan at the helm of FNB.
To be fair, bank share prices are generally under pressure, but FirstRand’s decline since Jordaan’s a nnouncement has been more severe than the sell-off in the rest of the sector. For all of his protestations that he was a fairly insignificant cog in a far bigger mechanism made up of individuals all far cleverer than himself – the market’s not buying it.
The share prices of the big four banks are ref lecting a broad deterioration in South Africa’s domestic economic environment with even optimistic forecasters putting growth prospects for the year closer to 2% than 3%. And with capital markets pricing in a growing likelihood of a rising interest-rate cycle – bank share prices are ref lecting tougher times ahead. Reserve Bank Governor Gill Marcus warned this month that the threat to inflation of the currency at R10/$ was significant. The Reserve Bank estimates that a 10% sustained depreciation in the rand results in a two-percentage point increase in the inflation rate, especially if the lower exchange rate is maintained over a longer period of time. It’s fairly inconsequential if the weakness manifests in a brief spike.
“To date, the pass-through from the exchange rate to inf lation has been relatively constrained,” Marcus said. “This is probably due to low growth and relative lack of pricing power in a number of sectors of the economy. Also, it could be that the recent sharp moves in the exchange rate are seen to be excessive and a sign of overshooting.”
Investors in bank shares though are taking no chan-
FirstRand Limited ces. Rising interest rates raise the risk of consumer defaults and with household debt-to-disposable income levels sitting at pre-2008 financial crisis levels, around 76%, banks are extremely vulnerable to rising bad debts.
Jordaan won’t comment on whether the market sees his imminent departure as a negative: “I am a buyer at these levels. We planted many acorns over the past 10 years. Some seedlings are not even visible yet. I am very comfortable with the entire leadership team and their innovation pipeline.”
Part of FNB’s success has been its ability to draw customers away from rivals with tempting offers to supplement what are otherwise simply commoditized banking products. Its rewards programmes, attractive offers on consumer electronics and canny advertising have lead to it gaining market share over the past two years.
However FNB’s rivals are starting to emulate it or at least want to be seen to do so.
Standard Bank is being increasingly aggressive in its activities to retain clients. Changing banks is a bind and if it can convince customers that they have a compelling reason to stay, they’ll make it harder for rivals to tempt them away. Standard has launched a new rewards programme for card users with cash back at major grocery retailers, not dissimilar to the Discovery Card. It has also incorporated discounted electronic devices and air miles schemes into an increasingly complex tapestry that it hopes will make its own customers think t wice before abandoning ship. Time will tell whether or not their customers are convinced enough to stick around or whether the momentum created by FNB’s aggressive brand positioning in recent years will carry it through to a new generation of leadership without much more than a blip on FirstRand’s long-term share price graph.