ACTION HERO
How Sizwe Nxasana saved FirstRand
SIZWE Nxasana, group chief executive of FirstRand, has presided over a banking group that has completely outperformed its competitors over the past few years.
Since enacting a new strategy when he took over in 2009, as the recession was tapering, Nxasana has overseen the emergence of FirstRand as the most highly rated of the big four banks, posting remarkable growth in this period.
The cold numbers themselves tell a story. From June 2009 to the end of FirstRand’s financial year in June this year, earnings per share had grown 29% per year, while profits reached R15.3-billion. The return on equity (ROE) is now 22.2%, from 13.1%. The share price has more than doubled from R14 to the current R33 — more than 25% annual growth rate including dividends. The ratio of FirstRand’s share price to its book value — a key measure for a bank — is now 2.5 compared with 1.6 then. Rivals haven’t come close.
Its market capitalisation at R190billion is closer to Standard Bank (R200-billion), for some time the continent’s largest bank, and has even, at times, surpassed it. The battle for supremacy rages on.
All of which seems pretty impressive. But many people forget how, barely four years ago amid the darkest days of the financial crisis, FirstRand was being castigated, its much-vaunted aura diminished by a 40% plunge in earnings, a fall in its share price and an unexpected loss from its highly rated investment banking arm Rand Merchant Bank (RMB).
The bulk of the R4-billion losses stemmed from RMB’s proprietary trading and bad loans suffered by WesBank.
This was shortly before Nxasana took the reins from Paul Harris, one of the troika of founders of the business alongside GT Ferreira and Laurie Dippenaar. FirstRand’s fortunes have changed for the better since.
Net interest income — the interest earned on loans — has climbed while the bank also kept a lid on bad debt, which has helped lift profits.
“We decided to have less volatile and more sustainable and diversified earnings coming from our dealings with customers, ’’ said Nxasana. This focus on customers has evidently paid off, given that FNB has netted some 1.1-million new accounts in the past financial year alone.
What this means is that FirstRand’s halo has been restored. Analysts mostly rate the share as a “hold”, as is Standard Bank and Absa, whereas Nedbank is a “buy” — but that’s partly because of the spectacular growth in FirstRand’s share over the past three years more than anything. Few are betting against Nxasana continuing the momentum.
The FirstRand job might be daunting, but the 56-year-old Nxasana has already had a stellar career. A chartered accountant by training, Nxa- sana co-founded black firm SizweNtsalubaGobodo; telecommunications, where he was CE of Telkom; and now banking.
He has been associated with FirstRand for the past 10 years since he joined in as non-executive director.
“I am still pretty young and the retirement age here is 60, so hopefully I have some way to go,’’ he said.
Which is just as well, considering how many moving parts he has to hold together.
FirstRand comprises First National Bank (FNB), investment bank Rand Merchant Bank (RMB), asset-backed financier WesBank which has a 35% share of the market, and investment management firm Ashburton. It used to be bigger, including Discovery and the insurance operations that included Momentum, but these have long been spun out into another vehicle.
Under Nxasana, FirstRand’s strategy has changed to:
Focus more on the customer, and offering him or her a compelling value proposition;
Foster innovation and entrepreneurship within the group;
Focus on enhancing operational efficiencies and risk management;
Expand in the rest of Africa as well as the South Africa-Asia corridor, including India.
It might sound like airy-fairy MBA-speak, but there’s a hard edge underlying this change.
“We have sharpened our customer offerings in our business units and have seen great take-up of our products and services. FNB has gained more than 2.5 million customers in recent years — with customers liking our innovative and affordable products that meet their needs. Our ‘Steve’ advertising campaign has worked well because it has been supported by real benefit for customers.
“RMB has also been gaining more mandates because it has the best talent in the industry and ranks as a leader in numerous surveys in areas such as corporate finance, BEE deal structuring, structured finance, and listings and is also respected in global markets trading,’’ said Nxasana.
Strategically, FNB has bet big on innovation, and hasn’t been shy to punt its prowess on this front.
Customers have lapped up its loyalty rewards programme eBucks as well as the relatively cheaper tablets and smartphones they can buy from FNB when they open accounts. Its smartphone app and the ease with which people can now do electronic and cellphone banking, have helped.
“We have had hundreds of innovations over the years that have benefited our customers and made us a better organisation,” said Nxasana.
More tellingly, FNB — ably led by departing chief executive Michael Jordaan — recently won the title of the most innovative bank in the world given by US-based BAI-Finacle Global Banking Innovation Awards.
The bank prizes itself on a decentralised, entrepreneurial culture. Management is always encouraged to start new businesses, both large and small, in their business units. Some of the new businesses initiated by the current generation of managers include investment firm Ashburton and various African businesses. Ashburton has been assembled as a new business that includes the about R44billion of wealth assets currently under management and its new offerings in alternative investments — such as RMB-originated infrastructure and private equity invest- ments — that will be offered for coinvestment to institutional clients.
“It must not be forgotten that our ‘founding fathers’ — the trio of legendary billionaire entrepreneurs GT Ferreira, Laurie Dippenaar and Paul Harris — founded numerous busi- nesses in the FirstRand stable, including insurance companies Discovery Holdings, Outsurance and private equity operator RMB Corvest,” said Nxasana.
Nxasana explained how FNB has “associate branches that outperform our normal branches on numerous metrics because we have empowered branch managers to manage them with minimal interference from the centre”.
FirstRand has kept its cost increases at 7%, close to the inflation rate, while the bank’s revenue growth has been about double that — which has allowed it to slash its cost-to-income ratio from 59% to 52% since June 2009.
Risk management has been made a priority since the crisis, and this has resulted in lower bad loans and impairments across the board, thus driving profits even higher.
However, one of FirstRand’s biggest vulnerabilities is that it still lags Standard Bank and Absa when it comes to growth in Africa, both of which now have sizable operations on the ground in many countries.
“We adopt a disciplined approach to acquisitions and this explains the reasons for not concluding transactions in Nigeria and Ghana given the price and other considerations,” said Nxasana.
“In many of the attractive markets we are eyeing, we continue to grow organically by establishing in-country franchises while always being on the lookout for medium-sized acquisitions in which we can embed our culture.”
But FirstRand has avoided the temptation to buy large banks in Africa. “Returns on capital are important to us and our shareholders,” said Nxasana. “We try to get most of our current and new initiatives to generate returns that are above the cost of capital as quickly as possible, and as you can see our ‘ economic profits’ — ROE is at 22.2% and cost of capital is just over 14% — have been good over the years.”