FirstRand: bouncing off the bottom

Article tools

	PRINT ARTICLE
	SEND TO FRIEND

Services

	Subscribe to newsletters		Feeds
	Become a Facebook fan		Follow Moneyweb on twitter

FirstRand H1 HEPS drop

Expects business volumes to remain ...

Recovery on its way.

JOHANNESBURG - FirstRand (JSE:FSR) believes bad debts have largely peaked, opening up the scene for benefits as impairments are written back. Moneyweb looks at the sort of figure based on the current impairment level.

Impairments dropped 13% to R3 225m for the six months ended December as the credit loss ratio (bad debts) dropped to 1.51% from 1.64% previously (Figure 1). In fact, bad debt ratios across all business units dipped. CEO Sizwe Nxasana says the long-term average is 0.9%.

Figure 1: Bad debt levels and trends.

The outlook for the bad debt ratio is pretty tame for the next six months; Nxasana expects it to end up between 1.4 and 1.5% with the big improvement coming in 2011 when it should be between 1 and 1.1%.

Nxasana couldn't be drawn on an actual figure the write back of impairments could bring, but looking at the smack it gave to earnings and assuming the bad debts eventually return to the long-term average then one could see a few hundred million rand being written back.

At the normal level, impairments almost halve from current levels which means a direct boost to net interest income too. For the current results if impairments were at the long-term average, then FirstRand would've been able to bank an extra billion rand at least.

Nxasana speaks about a boost from writing higher margin debt going forward. Asked whether this agrees with the competitive environment FirstRand operates in and whether the other big banks won't just be able to come in and steal customers, he states that he wants FirstRand to be the lowest cost provider of debt.

Naturally this is based on taking reasonable risks, says Nxasana.

The higher margins will then come from boosting efficiencies, such as through driving clients to electronic transactions instead of to branches.

The current results look pretty good compared to FirstRand's peers, with normalised earnings coming in a percent higher than December 2008. This is deceptive though and taken in context, the earnings are 23% below the peak of June 2007 (Figure 2).

Figure 2: Earnings for each half year starting December 2006.

This is still not bad compared to the nationalised banks in America and England.

The particularly bright stars of these results are RMB, with earnings up 829% to R1.4bn, and WesBank, with earnings up 93% to R470m. These results also need to be taken in context (Figures 3 and 4).

Figure 3: RMB earnings since the peak in 2007.

Figure 4: WesBank earnings since the peak in 2007.

Speaking of WesBank, CEO Brian Riley made the interesting observation that exotic sports car sales through the crisis were fairly stable, only dipping slightly at one stage due to concerns by buyers of the perception a new exotic car would create.

In terms of growth going forward, Nxasana isn't too excited about bad debt benefits for the next six months but is far more optimistic looking to 2011. He sees SA's economy resuming modest growth and the underlying business units benefiting from the low base of the crisis.

One potential sticking point for the bank is the continued high levels of debt consumers are burdened with (Figure 5). This constrains consumers ability to grow spending.

Figure 5: Household debt to disposable income in SA compared to the US and UK.