FirstRand’s results reflect rapid unwind of bad debts

at FNB and Wesbank and strong recovery from RMB

FirstRand Limited (FirstRand) today reported results for the year to June 2010. Against a difficult, but improving, macro background, FirstRand’s diverse portfolio of banking and insurance businesses produced a strong performance. Normalised earnings improved 39% to R9.9 billion with a normalised return on equity (“ROE”) of 18%.

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

“We are extremely pleased with this performance which was driven by both an improving macro environment and the positive results from underlying strategies executed by our operating franchises.”

The results from the Group’s banking activities reflect a significant recovery in profitability in comparison to the twelve month period ended 30 June 2009. The total banking portfolio produced R8.53 billion of normalised earnings, representing an increase of 41% compared to the previous comparative period.

This recovery in earnings was driven mainly by a modest increase in top-line and the reversal of the two most significant negative issues from the previous comparative period, namely bad debts emanating from the large lending books of FNB and WesBank and the losses from legacy offshore trading portfolios within RMB. Many of the banking operations also showed strong operational performances and the realisation of a significant private equity investment, Life Healthcare, positively impacted earnings by R 1.25 billion.

Says Nxasana, “the Group’s large retail lending books are experiencing rapidly reducing bad debts and, as an example of how positive this has been for our performance, the combined recovery in WesBank’s retail vehicle and asset finance book and FNB Homeloans and Credit Card books contributed R 2.3 billion of profits. RMB’s turnaround results from an on-going strong operational performance from investment banking and FICC, a significant private equity realisation and the non-repeat of losses from its international portfolios.”

The insurance business, Momentum also reported good earnings growth, positively impacted by a recovery in equity markets and a continued strong operational performance. Overall normalised earnings increased 10% to R 1.81 billion with the return on equity remaining ahead of Momentum’s target at 22%.

The Group continues to make good progress in terms of its international strategy. In Africa, the Group is busy staffing up its representative offices in Nigeria and Angola and FNB has invested further in building its infrastructure in Africa, particularly Zambia and Mozambique, where new branches were rolled out during the year. The Group’s relationship with China Construction Bank (CCB) has provided good opportunities for RMB with a number of notable transactions completed during the year under review.

The Group’s business in India is also beginning to gain traction, yielding opportunities for cross border investment banking transactions and opportunities for RMB’s Fixed Income Currency and Commodities Division (FICC).

Looking forward the South African external economic environment looks to have stabilised. Revenue growth in the medium term will remain challenging, however the retail credit environment is expected to continue to improve and as bad debts continue to un-wind this will provide support to the current earnings recovery in the Group’s retail franchises. Growth in retail advances will remain extremely low as levels of consumer indebtedness are still at historic highs. Corporate balance sheets remain strong and have weathered the cycle well, however in the current environment investment opportunities remain limited and therefore corporate advances will remain subdued.

Despite these pressures, Nxasana believes that given its strategy and high quality franchises, the Group remains well positioned to grow.

“We continue to focus on delivering on our strategic intent to be the African financial services group of choice, creating long term franchise value and delivering superior and sustainable economic returns to our shareholders within acceptable levels of volatility”, he said.

In executing on this objective, our franchises have made significant progress on their specific strategies. For example, RMB is successfully re-balancing its revenue mix, which is resulting in a better quality of earnings and less volatility and FNB is pursuing strategies to grow in those domestic markets where it is currently under represented.

We are growing our African franchises, targeting those markets that are expected to produce above average domestic growth and we are strongly positioned to benefit from the trade and investment flows between Africa and Asia, particularly China and India”.