FirstRand rebounds

FNB and WesBank’s retail lending books start to recover and RMB turns-around

FirstRand Limited today reported results for the six months to Dec 2009. Despite a tough operating environment, characterised by sluggish economic growth and real disposable income and jobs declining year-on-year, FirstRand’s diverse portfolio of banking and insurance businesses produced a satisfactory performance.

Normalised earnings for the Group improved 1% to R4.61 billion with a normalised return on equity (“ROE”) of 17%.

Commenting on the results, FirstRand CEO, Sizwe Nxasana said:-

“We are extremely pleased with this performance in what has been a very tough operating environment. We believe it reflects the underlying resilience of the Group’s operating franchises, in that it reflects good organic growth from operations.”

The Banking Group’s results reflect a significant recovery in profitability in comparison to the six month period ended 30 June 2009, although slightly below the level of December 2008, producing R4.04 billion of normalised earnings, representing a 3% decrease on the previous comparative period but more than double that of the previous six months to June 2009.

The improving earnings trend from FirstRand’s banking operations reflects the reversal of the two most significant negative issues from the previous comparative period, namely bad debts emanating from the large retail lending books of FNB and WesBank, and losses from certain offshore trading portfolios within RMB.

Says Nxasana, “The retail lending books, at FNB and WesBank are showing signs of recovery and the investment bank, RMB showed a significant recovery in profits on a rolling-six months basis as losses from its international portfolios decreased and the underlying investment banking and fixed income currency and commodity businesses showed good client and deal flow.”

The insurance business, Momentum also reported good earnings growth, positively impacted by a recovery in equity markets and reduced market volatility combined with a continued good strong operational performance. Overall normalised earnings increased 15% to R850 million with the return on equity remaining ahead of Momentum’s target at 22%.

Says Nxasana, “Momentum’s performance reflects the success of the strategies embarked upon over the past few years. The ongoing strong operational performance is evidenced in the fact that new business Embedded Value held up well despite volume pressure.”

The Group continues to make good progress in terms of its international strategy, is focusing on building its franchises in Africa, and has identified countries that it believes are strategically important. Key markets that offer good prospects are Nigeria, Zambia, Mozambique, Tanzania and Angola.

The Group is currently staffing up its representative office in Nigeria and is investigating opportunities in the Nigerian financial services industry emanating from the banking industry reform that is underway. In line with its strategy, the Group is interested in all key segments of financial services – namely corporate, investment, retail banking and insurance.

Given that China and India are South Africa’s important trading partners, positioning the Group’s franchises to capture the trade and investment flows with these countries is an important element for its African strategy.

Says Nxasana, “Our increased focus on China and India is beginning to bear fruit. Due to the relationship with China Construction Bank and the establishment of FirstRand’s branch in India, transactional flows with Chinese and Indian counterparts have increased and several significant deals have been concluded.”

Looking forward FirstRand anticipates a modest return to growth in the South African economy, however growth in advances will remain extremely low as levels of consumer indebtedness are still at historic highs.

Says Nxasana, “As consumers re-build their balance sheets and economic activity increases, FirstRand’s retail franchises, FNB and WesBank, will gradually recover, particularly from the resultant reduction in bad debts.”

FirstRand’s investment bank, RMB, is expected to continue its recovery, particularly as the losses from its legacy portfolios are expected to be significantly lower than for the year to June 2009.

The recovery in equity markets is expected to continue to benefit Momentum in the second half of the financial year.

Says Nxasana “Despite that some significant challenges remain in the economy for the next six months of the financial year, we do envisage a gradual improvement from current levels. FirstRand’s balance sheet remains robust from both a capital and funding perspective and this will allow the operating franchises to continue to take advantage of an improving cycle.”