FirstRand Defies South African Recession Woes as Retail Bank Shines

(Bloomberg) -- You wouldn’t say South Africa was in the grips of a recession by looking at the retail-banking unit of FirstRand Ltd., the continent’s largest lender by market value.

First National Bank, which accounts for more than half of FirstRand’s profit, is outshining its Johannesburg-based peers by adding customers and deposits, extending more credit to its top clients and boosting transactions through its mobile-phone banking app. A decline in credit losses as a percentage of total loans also helped to lift adjusted earnings at FNB by 16 percent in the 12 months through June.

Contrast that to what is happening in Africa’s most industrialized economy, which shrank an annualized 2.6 percent in the first quarter and 0.7 percent in the second to tip into its first recession in nine years. Since coming into office in February, President Cyril Ramaphosa has tried to restore investor confidence battered by almost nine years of misrule by his predecessor, while contending with a global trade war that is souring sentiment toward emerging markets.

A 4 percent increase in FNB’s customer numbers to 8.2 million “fired” up the business, which managed to improve the cross-selling of products from insurance and wealth management to mortgages and credit-card offerings, Chief Executive Officer Alan Pullinger said by phone. Transactions done over FNB’s app surged 65 percent over the year, contributing to a 10 percent increase in the group’s fee and commission income.

‘Soft Market’

“It’s difficult to switch customers from other banks and there aren’t a lot of customers entering the banking system,” the CEO said. “In a very soft market” that “kind of customer growth is a very impressive result.”

While the difficult macroeconomic environment in South Africa is expected to continue, FirstRand’s businesses have built “good momentum” which makes them well positioned for any upswing, Pullinger said.

The performance suggests that the company was “gaining huge market share from other banks” in the retail segment, said Patrice Rassou, head of equities at Sanlam Investment Management in Cape Town.

FNB, which also has units in Namibia, Botswana and Swaziland, had a better second half on the back of positive momentum from Ramaphosa’s ascendancy to the presidency after former President Jacob Zuma’s ouster.

Adjusted earnings jumped 21 percent to 7.72 billion rand ($503 million) in the six months through June, compared with the year-earlier period, according to data compiled by Bloomberg.

Shares Gain

FNB isn’t the only bank bucking South Africa’s economic headwinds. The personal and business banking division of Standard Bank Group Ltd., the continent’s largest lender by assets, increased first-half earnings before one-time items by 8 percent to 6.6 billion rand. Absa Group Ltd.’s retail and business banking unit posted a 4 percent improvement in profit to 4.2 billion rand in the six months through June, while Nedbank Group Ltd.’s consumer lender reported a 1.5 percent rise in first-half earnings to 2.6 billion rand.

Shares in FirstRand rose 3.7 percent, outpacing average gains in the six-member FTSE/JSE Africa Banks Index, which was up 2.9 percent by 2:06 p.m. in Johannesburg.

“They will have to invest in small businesses or seedlings to continue growing faster than GDP,” said Adrian Cloete, a portfolio manager at PSG Wealth, adding that insurance is one avenue of potential expansion for FNB. “If we have more weak macroeconomic growth, it will bring all earnings-growth rates down at the banks.”

Here are other highlights from FirstRand’s annual earnings:

  • Corporate and investment banking unit RMB reported a 6 percent increase in adjusted full-year earnings to 7.33 billion rand, boosted by a 31 percent jump in profit in the rest of Africa
  • Automotive division WesBank posted a 9 percent drop in annual profit to 3.63 billion rand as its South African vehicle-finance unit contended with increased impairment charges and margin pressure, while MotoNovo in the U.K.’s earnings dropped 15 percent in pound terms, also on the back of higher write offs
  • Aldermore, the British lender FirstRand bought for 1.1 billion pounds ($1.4 billion) earlier this year, should complete the integration of MotoNovo during the first half of 2019, according to Pullinger
    • “We’ve had a really good chance now to check the tires properly and take a peek under the bonnet,” Pullinger said of Aldermore. “We’re dealing with a really great management team. The chemistry is good. We can build something quite exciting there in the U.K.”

©2018 Bloomberg L.P.