RYK VAN NIEKERK: FirstRand is one of the largest financial services groups in the country, and it owns several well-known brands such as First National Bank and Rand Merchant Bank. FirstRand today reported results for the six months to the end of December, and it’s actually the only time when we can peek into the performance of the underlying operations.
James Formby is on the line. He’s of course, the chief executive of Rand Merchant Bank, a very, very interesting banking group in the corporate and investment space. James, thank you so much for joining me. It has been a very interesting year. Before we talk about the profit numbers, how do you think the current performance of Rand Merchant Bank compared to the pre-Covid levels?
JAMES FORMBY: Thanks Ryk, and good to connect and to chat. We exceeded our pre-Covid levels last year, in June 2021 already. So we’ve been fortunate that our business has been able to recover and grow above those levels for a little while. I think now, as we emerge from the pandemic, we can put that period a little bit behind us and start to look and pivot towards growth and optimism.
RYK VAN NIEKERK: Earlier today I spoke to Michael Sassoon of Sasfin and he said that during the strict lockdown period we saw in 2020, as well as in 2021, one in five of their business clients experienced financial trouble. That was a big concern for them. What has been your experience with your business clients?
JAMES FORMBY: We do play in the large corporate and institutional segment, so typically our clients are those with turnovers above R1 billion per annum – and they have been remarkably resilient. I think in the March to June/July phase of 2020, many of them drew down on a precautionary basis on some of their facilities, and they went into quite a cautious mode. But for the last six to 12 months we’ve actually seen them emerge from that.
There are obviously a few sectors that are still impacted, hospitality being one; but even that’s emerging now. Actually their balance sheets have been pretty strong. Our experience with them is more that they’re now at a stage where they are starting to invest for growth.
We’ve seen that at an SA economy level where the total capex spent, particularly on machinery, has started to tick up a little bit.
So we are actually seeing a much more bullish outlook and our clients are in fairly good health, other than a few of the sort of well-known and publicised examples that I’m sure you in the market would be aware of.
RYK VAN NIEKERK: Many of the banks were very aggressive with provisions and impairments last year. In the context of what you just said, how accurate were those provisions and what was the impact thereof on your current results?
JAMES FORMBY: I think that’s probably the biggest story of our results and I presume maybe of the sector, Ryk. So there’s no doubt that the IFRS 9 [International Financial Reporting Standard] required us to take a forward-looking view on the economy and provide accordingly, so we took extensive provisions in the 2020 year.
We actually continued to top up into the year to June ’21. So now when we compare the period to December ’21 with the period to December ’20, you can see that we’ve actually not needed to add at all to our provisions. It’s important to note that we haven’t subtracted from them on a total basis either. So we are at fairly similar provisioning levels in aggregate to what we were before, because we wrote and increased provisions in the last period. That has helped drive our profit. And I think looking forward, Ryk, we do see the outlook improving.
There’s obviously a fair bit of uncertainty right now with the Ukrainian invasion. We’d have to assess if it does start to impact markets more broadly, but for now I think that the direction you’re likely to see is that we don’t need to add any more provisions. We may need to reverse, depending on how fast our advances growth is, because if we grow our balance sheet, we kind of have grown into the provisions that we have already.
So there’ll be a number of dimensions that we’ll consider when we come to our year-end in June as to the provisioning levels that are required. But we’ve certainly in my view been very conservative with our provisioning levels, and we come at this new period of growth from a position of real strength in my view.
RYK VAN NIEKERK: Yes. I think maybe it would be more prudent to look at the pre-provision profit lines, because banks are normally a barometer of economic activity levels. What were your pre-provision profit levels and how do you foresee that number changing?
JAMES FORMBY: Thanks, Ryk. Our p-prop, as it’s called, was down slightly at just 2% down. I think you’re right to look at that number, because it does take out some of the noise of provisions. I think we’re still comfortable with that, given the macro environment and clearly we don’t expect that that will remain in negative territory. We want to resolve that.
But I guess to really accelerate it faster, we will need to continue to grow our advances book and we’ll need to continue to grow across South Africa and in the African markets. I think that is looking a little better, certainly, than it has for a while. So that’s the number we are focusing on as an executive team to make sure we lift that number.
RYK VAN NIEKERK: The South African economy is in a rebound phase, and the expectations are that the economy will grow relatively well this year, although it is part of the recovery cycle. But from next year and the year after, some forecast we saw – Enoch Godongwana making his presentation of the budget – suggests very, very low growth between 1.4% and 1.6%. Are you concerned about that?
JAMES FORMBY: Yes. I think that, in terms of the budget speech, Ryk, there was probably a missing chapter, because it was on balance a good budget, but the chapter missing was on structural reform to the economy.
I think that with the right focus on that – and this is a well-trodden path, many other executives have made this point – if we can get that right, and we can unlock some infrastructure spend and some confidence in the economy, get rid of some of the red tape that we have in multiple areas, I think we can lift that number. I am hopeful that in that chapter – certainly the president seems to want to write that chapter – over the next period of time we can start to see some uplift.
We are seeing some early signs that are more positive in the infrastructure space, so we are definitely seeing some upward momentum there.
So it is a concern, but I’m still hopeful that if the government does actually deliver even a small portion of the structural reforms, we will see it be a little bit higher than that.
RYK VAN NIEKERK: Where are seeing you the higher activity levels in infrastructure? Would that be renewable energy projects?
JAMES FORMBY: Yes. At the moment it’s predominantly energy. I think that will probably lead some of this. Clearly the relaxation by the minister on allowing up to 100 megawatts to be expedited is a huge unlock for our economy.
We are dealing with many large corporate clients who are looking at that. We are well progressed with them on funding that kind of infrastructure. That’s a huge unlock for South Africa because it will take pressure off our national grid over time. Those are all pretty much renewable-energy projects.
I think after that there will need to be a big focus – not after, but concurrently with – [on] South African logistics. We are not getting as much resources out of the country as we should because of deficiencies in our logistics infrastructure and our ports. I think there’s a lot of scope for the private sector to do more in that regard.
RYK VAN NIEKERK: Yeah. There’s a lot of scope for the private sector to do a lot more in many other industries as well.
But, just coming back to the 100-megawatt infrastructure opportunities – the president announced those early last year. How long does it take for those projects to come on line and actually translate into solar panels being installed, because it’s now close to one year later. When will we actually see those projects coming on line?
JAMES FORMBY: I think in reality, because there is still a pipeline of things to get done and they need to be financed, and then they need to be constructed, and that all takes time. So I expect that this will start impacting the grid during calendar ’23. I can’t foresee it will hit us or help us yet this year, but we will have to be patient, and I do expect ’23 and then into ’24 we’ll start to see a real build out, which can be meaningful.
We are talking quite significant quantities of power to be produced by the private sector.
RYK VAN NIEKERK: I would imagine the corporate and investment industry in South Africa would be queuing up to finance some of those projects. It must be a hot topic at the moment.
JAMES FORMBY: Sure. I think that there’s no doubt for the financial services industry. I think it’s not only banks here. It’s important that a lot of these exposures also are very well suited, once the development is completed, into our asset-management and pension-fund industries.
Banks typically structure and fund the development phase, and then some of that lands up in the broader financial services industry. We’ve already seen a round of renewables, projects, Reipppp [Renewable Energy Independent Power Producers Procurement Programme] Round 5 that happened last August.
So there’s lots of interest across the industry to help here, and actually across multiple dimensions, because you did make the point that it’s not just renewables. We stand ready to fund bankable projects across the board.
RYK VAN NIEKERK: Just lastly, merger and acquisition activity levels. Where are we relative to pre-Covid levels?
JAMES FORMBY: I think we’ve seen some deal flow in the last year pick up. A lot of that. The Heineken Distell deal is probably the flagship transaction in that regard. But we’ve also seen delistings, local investors taking companies private. So corporate activity has been good and we expect that to continue.
What I think will augment it in the current year is not only M&A [merger and acquisition] activity, with some global multinationals eyeing South African companies out, but I also expect some ECM – equity capital markets – activity as the listing market reopens, provided the Ukrainian situation doesn’t start dampening overall risk appetite.
RYK VAN NIEKERK: We’ll have to leave it there. James, thank you so much for your time today. That was James Formby, the chief executive of Rand Merchant Bank.