FirstRand faces tough challenge to stay ahead

FirstRand has patted itself on the back for its 7% normalised earnings rise for the year to June, but the market is sceptical. FirstRand’s share price retreated despite a higher dividend, likely because it did not foresee a rise on the return on equity for 2017, citing “challenging conditions”.

FirstRand faces competition from different directions, Capitec in particular, which is expecting interim earnings growth of 15% to 18%, double that of FirstRand as a whole and much better than First National Bank’s (FNB) paltry 5% rise.

On the corporate side, Rand Merchant Bank (RMB) delivered an apparently credible performance of 11% growth to June, but it is a much smaller outfit than Standard Bank’s Corporate and Investment Banking (CIB), which grew 19% at the interim.

By market cap, Standard lags with R263bn compared with FirstRand’s R301bn, though it grew interim earnings by 12%. FirstRand will have to pull out all the stops to stay on top.

The big question is from which hat FirstRand will pull the proverbial. FNB and Wesbank delivered flat performances and Capitec is blowing in FNB’s neck. FirstRand’s return on equity at 23.4% is still ahead of Standard’s 16.1%, but it is down from 2016’s 24%. It can be more difficult to defend a dominant position than growing earnings, and that is FirstRand’s dilemma.

Standard can fall back on CIB and advance in the domestic market, while FirstRand ponders its moves. RMB delivers about a quarter of total earnings, but CIB has greater muscle in the Standard group, contributing half of its earnings growth.

Maybe Capitec can by gobbling up customers at the expense of other banks, such as Nedbank and Barclays Africa. Nedbank, with Ecobank a drag on its earnings, has made progress with customers, but Capitec came out tops with Capitec’s market cap now level with Nedbank at R101bn.

If FNB ups its act, FirstRand can remain dominant. But that will be tough in this economy.

It is obviously difficult to quantify some of the setbacks endured by Spur Corporation in the lean second half of the year to end-June, but Spur chief financial officer Ronel van Dijk offered a startling take on the effect of the popular (but now discontinued) Monday night “two-for-one” burger special had on the company.

While the promotion was undertaken with the best of intentions (Monday nights being quiet) the exercise ended up costing Spur big time.

Spur clearly underestimated bargain hunters’ appetites. A hefty 85% of total burger sales across the 283-strong Spur chain were rung up on Monday nights. The average spend per head, with one drink being the norm, was a measly R45.

While this meant huge turnovers – in one instance up to R300,000 a night for a franchisee in the Western Cape – there was little or no profit in it. The same Western Cape franchisee has since seen turnover fall R200,000, but the monthly profit is up R200,000.

It was a tough decision to stop the specials, Van Dijk said, but it was critical to the sustainability of franchisees. Spur helped 150 outlets in April, May and June, she said. Since yearend, this number had fallen to 60 and the “barge was turning”.

Hopefully, some growth is already under way and cashflush Spur won’t need to substitute its dividend with burger vouchers any time soon.