FirstRand ups dividend on higher earnings

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JIMMY MOYAHA: Before the market opened this morning, FirstRand gave us an update on how the first six months of the year has gone. We’re going to be looking into these numbers, trying to make sense of how the banking group is performing.

I’m joined on the line by FirstRand CEO, Mary Vilakazi, to take a look at the numbers. Ms Vilakazi, good evening. Lovely to catch up with you, as always. A strong start to the first half of the year. Very little to look back on and not be happy about, but how do you reflect on it as a team?

MARY VILAKAZI: Thank you, Jimmy. I think if I look back to six months ago when we announced our year-end results and we were looking ahead we certainly expected an even more challenging environment. The big thing that I guess has worked in our favour is that rates have come down. So now we have 75-basis-point cuts …

Inflation came down quite a lot, so that was obviously the trade-off for the rate cuts, and that’s good for that retail business.

In the six months to the full year FNB had seen really elevated levels of impairments, largely driven by the fact that we had also continued writing new business, which is fine, I think – that credit charge you want, because it’s a provision, but it was the bad debt and customers being in distress.

So it is very good to have seen an improvement in the six months to December. People were drawing down on their pension funds. Some used that to pay debt and we are seeing that in the improvement in the outstanding debt.

So yeah, when we give guidance about what we’re expecting, we’re still expecting severe strain in credit. And what is better than we expected is our cost management. With our cost-to-income ratio at 48.9% I’m particularly pleased, and I’m grateful for the effort that FNB in particular has put in that.

The numbers to December 2023 included R700 million from our investing business. Now that’s lumpy business; we don’t have a similar amount in this six-month period. So to have grown off that demanding base in the previous year and having generated 10% earnings, I think is a pleasing income.

And also I think quality earnings, because earnings are made up by a lot of provision reversals on credit – [so] generally clean performance numbers driven by good top-line growth and good cost management.

JIMMY MOYAHA: Speaking of that growth, I want to take a look at the business. The business has quite a few parts, and I want to look at the offshore business, particularly starting off with the African business and then kind of looking into the UK business.

The broader African business saw quite a big growth in deposits – and obviously for a bank it’s always a good thing to be able to diversify out of your home region but to penetrate new markets; but also looking at the performance from the UK business, to contribute sort of 9% towards that earnings number you mentioned.

MARY VILAKAZI: Jimmy, I think our footprint is relatively small compared to some of our peers, but we’ve taken the approach that in the nine countries that we are in outside South Africa, we’ll focus on building out franchises similar to what we have in South Africa. So strong franchises, and retail and commercial and RMB have actually always done well, and I think that’s really more established on the continent.

So that deposit number that you’re looking at for us is the testament of the fact that we now have customers, because deposit-gathering is the one activity where my predecessor used to say we’ve got unlimited appetite for deposits.

But it’s also on the back of trust. It’s on the back of an entrenched customer relationship. So for us it’s a good sign that we are growing customer numbers in the broader Africa, growing deposits and generating returns.

We measure economic profits. That’s actually the profit you generate beyond the cost of capital, and this portfolio has started delivering really satisfactory economic returns and a sufficient level of dividends that come away. So we are quite proud of our broader Africa portfolio.

And then the UK and broader Africa generate about 20% of our earnings. So, depending on the cycle, one will be 10%, one will be 11%. And our business in the UK is a lending business focused on lending properties, property finance, business finance, and motor.

The UK has had its own fair share of lacklustre growth, so I think for that business to being able to grow advances, extract decent margins – also because they don’t have a deposit franchise like we have in other markets – they have to pay up for the funding.

And then because we are not going to send rands across to the UK, if they run out of funding they have to run with access funding.

That brings down their margin quite a bit. So they earn good margins on lending but pay up quite a bit for their funding, and that impacts their margin.

But I’m quite pleased that there’s good growth, and there is focus on making sure that they’re generating appropriate margins and also becoming better.

I think with the technology stack you can see the origination went up by 70% in property finance, because now the systems are a bit more modern, they can be more agile and price a lot more responsibly.

So a growing business, a tough neighbourhood, but I think we’ve got a small business in a tough neighbourhood.

JIMMY MOYAHA: Mary, I want to stick to the UK for a second. There was of course that legal and regulatory conversation that was happening with the FCA [the UK’s Financial Conduct Authority] from a business perspective. There was that R3 billion provision that you had put aside for potential impacts there. I want to look at that, and what’s happening there. I know that it’s still in the works, it’s still on the go. I want to just get an update around where we stand with that.

MARY VILAKAZI: As I said, we’ve got a good business but we’re in a tough neighbourhood. One of the things that make it tough is exactly that.

So what we raised the provision for – the R3 billion at the end in June – was for a review by the regulator.

In response to a lot of cases, court cases that had been taking place, the regulator stepped in and said ‘Look, let’s just rather do this in a very systemic way; let’s have a look and see if there was actually customer detriment’ – because commission agreements used to be that dealers were able to flex the interest rates, and customers paid. And then on the back of that they had outlawed it in 2021 and said, look, because it can result in customer detriment going forward, interests should just be fixed, and [not be] dealing [with] commission.

So we’ve done that post 2021. But they said, well, seeing now [there are] all these court cases, let’s have a look and go back and see pre-2021 areas where there was customer detriment, and then consider [a] remediation plan.

Now, Jimmy, I think where customers paid a higher rate than they should have, we are the first ones to just say, that’s fine, we should then do the right thing.

[But] it’s quite hard to start off and say, okay, how did the customer experience detriment, because the interest rates you pay and I pay can be different depending on our own credit quality.

You can be a better negotiator than me, you could be getting a very different deal because you’re trading in something different.

So even with that provision we still needed to go back to specifics around what happened for each customer, but we needed some guardrails from the regulator. That’s what we were waiting on, and then we raised that provision in June.

What subsequently happened is that some of these cases were taken on by claims-management companies and they took it to the higher court, and the higher court’s judgment we got in October was I think quite a bit of a surprise – and we don’t agree with a lot of what came out from that procedure because it went a bit further than customer detriment.

It said, well, in these commission agreements the customer didn’t have full disclosure that the dealer is earning a commission. So therefore that makes it a ‘secret commission’ because the dealer had a fiduciary responsibility. And therefore the commission paid to the dealer must now be refunded to the customer.

That’s applicable to a lot of credit broking, so if you’re buying a phone and you get financed there, even those kind of agreements get caught.

What is encouraging for us is that we submitted a leave to appeal. We had a lot of support from people who thought that the Supreme Court should hear this case. The regulator, obviously the dealers, given what’s at stake for them, and then also the finance ministry, the HMT, came out and said: ‘Whatever the clarity provides, I think the courts need to take into account that you can’t enrich customers.’

I think if a customer didn’t pay the commission, the base on which they get a refund of the commission paid to the dealer doesn’t make sense, and I think that’s going to have severe impacts on availability of credit in the UK.

So they all stepped in and I guess we were granted leave to appeal on all six grounds, and also I think we were told that this case will be expedited.

I suppose those are encouraging signs that where we sit, we have to wait for the outcome of the court cases. We have to wait for that other regulatory review that took place in order for us to know what needs to happen.

Obviously there is a lot of legal uncertainty. Nobody likes it, but it is what it is. And I guess it is good that the case will be heard in early April and I think we should have an outcome a couple of months after that.

JIMMY MOYAHA: Mary, before I let you go, I want to take a look at prospects going forward. You touched on the fact that the inflation conversation is finally something that you might be able to put to bed in terms of economic conditions, but it could resurface given the emerging geopolitical challenges that we’re seeing – particularly with tariffs being imposed on countries left, right and centre.

I want to get your thoughts around what you see as challenges potentially in your environment going forward, whether locally or internationally.

MARY VILAKAZI: I think the immediate concern is really the impact on global inflation because, as much as our inflation was contained, there’ll be a portion of transmission to the SA landscape and that will just delay any further interest rate cuts.

Then I think we live in an environment where the repo rate stays above 7% for quite a long time. That’s not a good story for households and consumers.

But fortunately in this cycle, our expectation is that there will be an improvement in economic activity in SA, and in some of the markets that we are in on the continent. That should be supportive of small businesses in particular, and then I think large corporates.

So I think as we look forward we think our growth is going to be more supported by commercial and wholesale in this cycle.

And I think for the country, really, [with] the geopolitical tensions, when you’ve got problems outside you need to come back home and ask: ‘What is within my control?’

This is where the structural reforms that the government has identified as things to unlock energy, logistics, crime and corruption, which impact business confidence, all those key priorities and more water – I think it’s time now to ensure that there’s accelerated execution because we need the growth of the country to lift further to where it is. That’s the only way you can be resilient to any shocks that can happen from the geopolitical environment.

It’s when you don’t have a buffer to absorb these shocks that I think is sensitive.

But yes, I think South Africa has got its own ability – given what we haven’t done for a few years – on just making the economy efficient, making it easy for a lot of businesses to do business, and a lot of households to do what they need to do.

I think we can unlock sufficient growth to just give us some headroom.

JIMMY MOYAHA: Economic growth is the buffer to geopolitical tensions, and that’s exactly what we need.

I think we’ll leave the conversation there. Mary, thanks so much for the time and for the insights.

That’s Mary Vilakazi, the chief executive officer at FirstRand, joining us to give us a sense of how their first half of the year has started off and what they’re looking at towards the next half of the year.

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