A per­for­mance that al­most de­fies logic

Financial Mail - Investors Monthly - - Analysis - War­ren Thomp­son

The 180th an­niver­sary of First Na­tional Bank (FNB) re­vealed the fi­nan­cial part­ner of mil­lions of South Africans to be in its strong­est shape yet.

Its per­for­mance has pro­vided a tide in which all boats in the group could rise, al­low­ing FirstRand (un­der new CEO Alan Pullinger) to de­liver earn­ings and div­i­dend growth of 8% to R4.70 and R2.75 re­spec­tively for the 12 months to June.

FNB, un­der CEO Jac­ques Cel­liers, grew its nor­malised earn­ings 16% to R14.8bn and now ac­counts for 57% of the group’s earn­ings.

Its re­turn on eq­uity for the year came to a spec­tac­u­lar 40%. Imag­ine that — for ev­ery R1 of eq­uity FirstRand puts into that busi­ness, it gets 40c back within 12 months.

What’s even more im­pres­sive is that FNB achieved this when, for half of the re­port­ing pe­riod, SA was in re­ces­sion. It al­most de­fies logic.

While Pullinger is a sea­soned in­vest­ment banker — he led Rand Mer­chant Bank (RMB) for a num­ber of years — his first as­sign­ment as FirstRand chief was to un­der­stand the power of re­tail bank­ing: FNB. He prob­a­bly won’t find many bet­ter mod­els in the world.

As Cel­liers points out, these re­sults were the fruits of ini­tia­tives and strate­gies sown many years ago. “It’s tough out there. Our strate­gies are sound and con­sis­tent and show that we can make money in tough times,” he says.

What is this strat­egy? “It re­volves around the pri­mary bank re­la­tion­ship,” says Pullinger.

“We have peo­ple com­ing to our dig­i­tal chan­nels ev­ery day to trans­act. Ev­ery time they trans­act there is a chance for us to in­ter­act with them. When they do that we gen­er­ate data and learn about them and this is what drives this Ama­zon plat­form think­ing, where we can be­gin to of­fer tai­lored ser­vices and prod­ucts at the ap­pro­pri­ate times.”

It ap­pears the strat­egy is still in its in­fancy.

Pa­trice Ras­sou, head of eq­ui­ties at San­lam In­vest­ment Man­age­ment, thinks FNB’s per­for­mance was phe­nom­e­nal. “They are gain­ing cus­tomers across the board. De­spite their say­ing they are cau­tious, it be­lies what is go­ing on be­neath. Card’s lend­ing book was up 24%, while per­sonal loans rose 46%. It’s big num­bers at a tar­geted client base.”

RMB was a tale of two ge­ogra­phies. The SA unit grew profit be­fore tax by 2% to R8.6bn while the rest of Africa grew by 31% to R1.7bn, which meant that over­all the in­vest­ment and cor­po­rate bank­ing fran­chise grew earn­ings broadly in line with in­fla­tion at 6%.

Wes­Bank is hav­ing a tough time. The mo­tor ve­hi­cle fi­nance arm saw earn­ings fall by 9% to R3.6bn while re­turn on eq­uity fell to 17.4%. In a fairly stag­nant mar­ket, Wes­Bank had com­pet­i­tive pres­sures af­fect­ing its mar­gins. It also had prob­lems with its credit scor­ing. “We had data we were us­ing in our score­cards [that are used to de­ter­mine the amount and price of credit ex­tended] that were prob­lem­atic and we

picked up the prob­lem too late,” says Pullinger.

Ad­di­tional prob­lems arose in client re­pos­ses­sions, where own­ers of cars in de­fault forced the bank to ob­tain court or­ders be­fore it could re­pos­sess. This in­creased the time and cost in­volved in tak­ing ve­hi­cles back.

Sim­i­larly, the per­for­mance of MotoNovo — the UK equiv­a­lent of Wes­Bank — saw earn­ings be­fore tax de­cline 15% in ster­ling terms. Part of the rea­son for this was higher fund­ing costs, which hit com­pet­i­tive­ness. FirstRand thinks its re­cent ac­qui­si­tion of Al­der­more Bank in the UK can add value to MotoNovo by help­ing to lower the cost of fund­ing.

There are not many places to hide in the re­tail arena on the JSE at the mo­ment, but FNB — through FirstRand — is def­i­nitely one of them. The mar­ket ex­pects the group to grow earn­ings by 10% in the year ahead. The pre­mium cer­tainly looks jus­ti­fied.

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