FirstRand: recovery better than expected
• Trend is upward, says CEO Pullinger • Group builds its provisions for bad loans to R9.4bn
In a sign that the economic recovery has held up better than anticipated, the boss of FirstRand kicked off an earnings season for big banks with upbeat comments about household and corporate finances.
“Things are going better than we thought. The recovery in the economy has been faster than expected, and we thought job losses would be worse than they have been,” CEO Alan Pullinger told Business Day after the company issued a half-year earnings report.
FirstRand, the first of the big banks to report 2020 earnings, and its rivals have lined up billions of rand to absorb a wave of unpaid loans as the economy — gripped by the Covid-19 pandemic and lockdown measures — bleeds jobs and triggers corporate failures.
Its earnings report, especially its second-half performance, which runs from June to December, offers a glimpse of how the industry has been performing since the government started a piecemeal reopening of the economy in June.
Total non-performing loans — those in which customers have skipped repayments — increased 36% from December 2019 to December 2020 across FirstRand’s loan book. This comprises unsecured lending and residential mortgages, vehicle and asset finance, and commercial and corporate lending as well as lending by group subsidiaries in the rest of Africa and the UK.
FirstRand, alongside rivals, pre-empted a wave of soured loans in the early months of the lockdown in 2020, offering payment breaks and other relief measures after the Reserve Bank gave the industry a temporary pass to dip into regulatory capital buffers.
“The relief book started to taper off; we knew customers would not be able to pay. They would ask for more relief and that would be a stage roll [debts moving from performing to non-performing loans]. But none of that was worse than we thought,” said Pullinger.
Despite bad debts performing better than expected, the
group added provisions of R663m at the end of the period as SA entered adjusted lockdown level 3 in late December, bringing the amount set aside to absorb bad loans to R9.4bn.
While the effect of the lockdown, whose restrictions were substantially rolled back this week, could not be immediately quantified by FirstRand’s credit models, it was evident in the activity and transactional data the group collects across its vast client base.
“There was a sharp downturn in the data in January, but it started to trend up slowly in February, and overall the trend represents a recovery, barring a few sectors like gaming, hotels and leisure,” said Pullinger.
Shares in FirstRand rose more than 2.5% to R53.62, its best level in about a year, as investors looked past a one-fifth drop to R11bn in half-year earnings and focused on the resumption of dividend payouts.
After updated guidance from the Reserve Bank last month giving the green light for institutions to resume paying dividends subject to conditions, FirstRand declared an interim dividend of R1.10 per share, 21% lower than a year ago.
Even as Pullinger is positive about how the recovery has held up, he said he was comfortable with the relatively benign volumes of credit extension.
“This is not the time to open the lending taps, so we are not uncomfortable that our lending book is flat period on period.
“We are focused on helping clients manage their loans,” Pullinger said.
The biggest component of group earnings (66%) came from FNB, which reported a decline of 20% to R7.3bn compared with a year earlier.
The pandemic has provided new opportunities for the bank to grow, said FNB CEO Jacques Celliers, adding that the troubles experienced by the Land Bank had provided FNB with the chance to originate more loans in the agricultural industry.
Consumers’ heightened propensity to save and be more conservative with their finances has led to a surge of new accounts in the wealth & investment cluster, which offers stockbroking, unit trusts and tax-free savings accounts.
The account base increased 18% year on year.
“We think we are going to take over the market and take out some of these older-school actors,” said Celliers.
But it is not just in the investment segment that the bank wants to take the fight to the competitors. Celliers said FNB is well positioned and intends to use its digital platforms to compete at the lower end of the market, where new offerings will be launched in the immediate future, as well as at the top end of the banking spectrum.