Mixed reaction to FirstRand’s ‘excessive’ caution

VOLATILE commodity prices are making FirstRand’s incoming chief executive, Johan Burger, jittery to the point where he is taking “excessive” steps to protect the bank, according to some analysts.

This week, the JSE’s platinum index plunged to its worst level since 2005 as the metal price remained under pressure from a stronger dollar, while volatile oil and gas prices are weighing on banks that have exposure to the sector.

The bank’s decision to raise its provisioning for bad debt is a move that Burger sees as “strengthening the balance sheet”. It is a proactive approach that “we deem prudent considering where we are in the cycle”, he said this week after the release of the group’s interim results.

The increased provisioning is attributable to the bank’s corporate book, especially the Rest of Africa portfolio — excluding South Africa — which is estimated to be worth R27billion.

The South African corporate portfolio book is worth R214billion.

Burger said the affected Africa exposure consisted of mining and metals, oil and gas, as well as Nigeria and Angola. High-risk exposures amount to R901-million, or 1%, of the total corporate credit exposure.

“We thought it prudent to have some level of proactive portfolio provisions against that high-risk portfolio,” Burger told investors.

He stressed that “this is the right thing to do” even though the bank itself did not have direct exposure to the underlying commodities.

Rather, it is the many First- Rand clients the group has lent to who now have their revenues under pressure due to low commodity prices.

Kapilan Theiventhirampillai, a senior banking analyst at Bloomberg Intelligence, noted that Standard Bank has also acknowledged that some of its customers were starting to feel the strain of low oil prices.

Ian Cruickshanks, an independent analyst, lauded FirstRand for raising its provisions because “they’d rather be safe than sorry”.

But not all analysts see it that way. Vincent Anthonyrajah, research analyst at SBG Securities, said FirstRand’s approach to provisioning was “perhaps excessive”.

Although he understood that management needed to be conservative in a risky environment, Anthonyrajah argued that the specific provisioning may prove to be much higher than the possible write-offs over a long period.

Francois du Plessis, MD of Vega Asset Management, said that as the uncertainty persisted in the market, he would rather invest with a company that’s a bit too cautious than one that’s too aggressive.

“I would not fault FirstRand for this approach,” Du Plessis said.

FirstRand reported an 11% increase in net interest income spurred by growth in advances and deposits.

Normalised earnings jumped by 15% while return on equity grew to 24%.

The banking sector as a whole grew earnings ahead of expectations, according to Emilio Pera, E&Y’s Africa financial services sector leader.

Headline earnings increased by 11.6% despite weak GDP growth of 1.5%.

We thought it prudent to have some proactive provisions Conservative management’s needed in risky environment