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FirstRand milks the consumer cash cow

21 September 2007 Gareth Stokes

On Tuesday, 18 September 2007, FirstRand presented its results for the full year to June 2007. The large audience expected a stellar performance from the group and hoped that earnings growth would come in at the top end of the 25% to 35% range announced e

A number of different financial service companies contribute to FirstRand's bottom line. For this reporting period the banking group (which includes First National Bank, Rand Merchant Bank, Wesbank and Outsurance) was responsible for 82% of normalised earnings with Momentum (14%) and Discovery weighing in with the remaining 18%.

Today's article looks at the results achieved by some of the franchises in the banking group.

Customers chip in the bulk of profits

Our first stop is First National Bank, one of South Africa's big-four banks. FNB's net profit before taxation topped a massive R5.663 billion and helped the overall contribution from the banking group to pass the R10 billon mark for the first time. A great portion of the banking growth is attributed to growth in new customers and customer transactions.

The FNB consumer segment contributed 41% to profit before tax in 2007. This statistic proves how effective the bank has been in extracting maximum value from its 2.2 million private customers. And its not just private customers that pay. FNB increased the number of commercial customers to 394, 000 in the period under review. This quality client base contributed significantly to the increase in transactional activity.

It is interesting that despite various consumer actions and mounting pressure on banks to lower their fees, FNB continues to earn a significant chunk of its profit from transaction charges.

Commercial unit showing solid gains

The star performer for this results period is undoubtedly RMB Holdings. The 83% growth in profit before tax underlines the strength in South Africa's corporate and commercial sectors as the country gears up for 2010. The growing infrastructure expenditure has resulted in a fantastic environment for small and emerging business entities and is confirmed in the contribution of commercial and corporate divisions in a number of other financial services company results too.

RMB profited from a well balanced portfolio with contributions to net income evenly distributed between equities trading (27%), private equity (25%), investment banking (24%) and fixed income, currency and commodities (14%). Other activities chipped in the remaining 10%.

The most significant growth in profit before tax came from equities trading, with a 229% improvement from the previous year. FirstRand attributes this performance to a strong domestic economy and increased activity in the capital markets. RMB continues to acknowledge the contribution of human capital to its fine performance, noting that no investment bank can perform without top people.

Credit act gains a foothold

The national credit act and rising domestic interest rates have combined to exact a telling toll on domestic consumers. Nowhere is this better illustrated than in Wesbank's 2007 performance.

Wesbank was hit by a sharp slowdown in retail new business in the motor and loans lines. It suffered from higher bad debts locally, and posted losses in its two offshore operations. A major contributor to the bad debt problem was the "deterioration in used car prices, which led to lower values in repossessed vehicle sales." There are many vehicle owners with residual payments on their vehicle instalment sale agreements who will be just as hard hit by current market conditions. Although credit scorecards remain robust, South African household debt as a percentage of disposable income has risen sharply since 2001 and is starting to impact on willingness to take on more debt.

Many of you will not be aware that Wesbank operates in the UK and Australia. Both offshore operations posted losses in 2007. UK based Carlyle Finance continued to invest in people and systems and posted losses in line with expectations. MotorOne Finance in Australia posted larger than expected losses for the year.

While First National Bank believes the NCA will have only a marginal impact on its 2008 year, the same cannot be said for the group's vehicle finance giant.

Group chief executive, Paul Harris, says the FirstRand results are a tribute to management and staff. He believes that the South African growth theme remains intact and that expectations for a solid 2008 are realistic. The group's mix of excellent financial services franchises will ensure growth in the coming year.

Editor's thoughts:
It is interesting to note consumers (private and commercial) account for the largest slice of after tax profit at the group's banking operation, First National Bank. Banks seem to be ignoring the public scrutiny being applied to their service pricing practices. And the various investigations into inter-bank competition have not stopped the disproportionate costs borne by the man in the street. What can South African's do to reverse the situation? Send your comments to

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