Jor­daan ef­fect

Finweek English Edition - - COMPANIES & INVESTMENTS - Bruce Whit­field

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.

Michael Jor­daan

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