Tough economy weighs on FirstRand results
On Tuesday 15 September 2009 FirstRand Limited posted its year end results for the 12 months to June 2009. Group earnings fell 32% to R7.1bn! Divisional contributions to group earnings came from First National Bank (R3.756bn), FNB Africa (R514m), Rand Merchant Bank (R1.536bn), Wesbank (R324m), OUTsurance (R307m) and Momentum (R1.649bn). Losses were reported at the group’s corporate centre (R381m) and FirstRand Head Office (R554m). The only division to report a slight improvement in earnings over 2008 was direct insurer OUTsurance with a 14% increase.
FirstRand is great proxy for the financial services industry. The company’s diverse business portfolio includes banking, investment banking, short and long-term insurance, healthcare and asset management. Group chief executive, Paul Harris, said “the group’s corporate and commercial banking franchises which operate in the primary and secondary markets, produced acceptable performances, as did the retail franchises, despite the difficult consumer credit cycle.” The big problem for the group – as with other financial heavyweights reporting earlier this year – was bad debt. Harris was particularly concerned with the “absolute size of retail bad debt, particularly in the residential mortgages portfolio!” The group incurred an R8bn impairment charge over the year. Profitability was also hampered by additional losses from “offshore legacy portfolios” at the group’s investment bank.
Bad debts surge as consumers falter
Bad debt, declining asset growth and the swift fall in interest rates eroded earnings at First National Bank (FNB). The good news is that the strict credit origination strategies introduced since early last year are showing signs of ‘righting’ the arrears situation. The group is confident new business written is of a better quality. “FNB’s performance was satisfactory, producing a return on equity of 26% despite normalised earnings decreasing 19%, with its diversified retail portfolio continuing to show good growth in non interest revenue and deposits,” said the group.
It was a tale of two halves at FirstRand’s investment bank operation, Rand Merchant Bank (RMB). Although the investment banking business performed admirably, RMB’s SPJ International (SPJI) suffered mark-to-market losses (and value declines) of R775m for the period. The group announced that SPJI had been completely closed down and that dedicated specialist skills had been allocated to ‘work out’ the portfolios. “The remaining illiquid positions total around $224 million at current valuations,” said the group. Over the same period the RMB Equity Trading suffered losses totalling some R782m! Vehicle finance division Wesbank ran foul of increased credit defaults and dismal new business volumes.
Resilient operational performance from Momentum
“Although the earnings of the insurance subsidiary Momentum are significantly exposed to the equity markets, its diversified business model and conservative capital management contributed towards a positive operational performance,” said Harris. The group experienced difficulties due to poor market performance (the JSE All-share declined 29% in the first half of FY2009, recovering 3% in the second) and a worrying reduction in personal disposable income. Consumer woes contributed to a slowdown in new business volume growth and a marked increase in the lapse ratio. The division expects these measures to improve going forward.
New business fell in most of Momentum’s core businesses with FNB Insurance (+37%), Group (+22%) and Health (>100%) the exceptions. Growth was attributed to solid improvements in the umbrella funds broker footprint and the corporate risk broker channel. Lives under administration (in the health division) increased 16% to 553 200. Although Momentum recorded an 18% decline in earnings (from R2.004bn to R1.649bn) the performance was mainly due to poor market conditions.
Difficult trading environment
The macroeconomic outlook remains cloudy. FirstRand says there are signs that the global economy is picking up. Policy stimulus in developed economies has resulted in an up-tick in global trade and improvements in PMI numbers as companies restock their inventories. But South Africa is still in the doldrums. Domestic demand is slowing at its fastest pace since the mid-1980s, employment is falling and real disposable income is in reverse. To make matters worse households are struggling to come to terms with record levels of debt while credit remains tight. Although there’s little doubt South Africa will follow the US and UK out of recession the recovery is going to be drawn out.
“The South African economy is still facing difficulties. The consumer will remain under pressure in the medium term, despite the recent easing of interest rates, as the excesses created in the previous upward cycle unwind,” said Harris. “Given the degree of economic recovery envisaged over the next 12 months, we believe that overall top line growth will remain under pressure, although earnings should gradually recover from current levels.”
Editor’s thoughts:
FirstRand’s bad debt impairment charge starkly underlines the pressure the South African consumer is under. The bank says it will take a while for its stricter credit policies to reduce this measure. Are banks’ historic lending criteria to blame for the current spate of bad debts, or did economic conditions make them unavoidable? Add your comments below, or send them to gareth@fanews.co.za
