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FirstRand HEPS up 5%, RoE at 24%

FY results. ‘A very good outcome, given the economic environment’ – Johan Burger, CEO, FirstRand.

SIKI MGABADELI:  First Rand’s normalised earnings for the year to June grew 7% to R22.9bn. The group, which owns FNB, RMB and WesBank, said basic headline earnings per share were up 5% to 399.2c. Return on equity dropped to 24% from 24.7% in the previous period.

Johan Burger is CEO and joins us now. Johan, thanks for your time this evening. David Shapiro and I were talking about the good old days when we got so used to seeing double-digit growth from our banks. But the times are a-changing and the economy is just not what it used to be.

JOHAN BURGER:  Hi, evening, Siki. Yes, you are right. But I think if you look back, the macroeconomic environment is very different from what we saw in the previous five years. Obviously post the global financial crisis we’ve gone through a period of good employment, lower interest rates, low inflation and job creation – all those good things that are positive for credit extension and consumption. That story changed into more one of headwinds two years ago, and obviously those do have an impact on the overall profitability and growth levels of institutions the size of FirstRand. We are not new to cycles

But I think the result we produced today, with an 8% growth in earnings and dividend and a return profile of 24%, we believe to be a very good outcome, given the economic environment.

SIKI MGABADELI:  In addition to the tough economic environment, you also have to invest for the future and part of what you’ve been trying to do is to invest in future strategies that will ensure long-term growth. Just tell us about that.

JOHAN BURGER:  Ja, I think that we made the point in the results that you do make certain trade-offs, both from a return perspective and from a growth perspective. Some of the short-term hits in growth that we have taken are exactly the point you made. I think we have deliberately taken off risk – i.e. reduced lending extension – in the second half, because we are concerned about introducing unnecessary volatility in the growth rate, and therefore suffer short-term growth but make it more sustainable in the long term; less volatile, more sustainable earnings. And then beat the great initiatives – another impact in the short term on the growth rate, but doing the right thing for shareholders in the long term.

So the investment in the new business initiatives, the asset-management initiatives, the insurance initiatives, the initiatives into the rest of Africa – those all require a lot of investment. But we put that in the bucket of the right thing to do for the business, long term. So we run the business long term and, if that means in the short term we have growth constraints, that’s the way we do it.

SIKI MGABADELI:  You, along with your peers in the business sector and the financial services sector have raised your voices around concerns about a sovereign rating downgrade, and you talked about the chances of that having risen this year owing to the stagnant economic growth and the political uncertainty. Do you think as a country we can weather this, and how do we get ourselves out of this hole that we’re in?

JOHAN BURGER:  I think that when the rating agencies did the review in June, as you rightfully said they highlighted two specific things that are very important in the way that they look at the rating, which are the independence of the central bank and the independence of National Treasury. It absolutely is in nobody’s interest if we don’t demonstrate that that should stay in place. So it’s not good, not good for us to not be able to demonstrate that those things will remain in place, because the consequential impacts of a rating downgrade could have negative implications of currency, it could have negative implications on inflation, it could have negative implications on interest rates – which means those things are all bad for growth, they all bad for consumers. So we’ve at all costs tried to avoid that.

So yes, business is continuing to engage with government on this topic to do as much as we can to see whether we can weather this downgrade. But I think we are making a lot of effort in the engagement with government to see to what extent we can demonstrate collectively that between business and government we want to do the right thing long term to avoid this downgrade.

SIKI MGABADELI:  All right, we’ll leave it there. Chief executive officer of FirstRand, Johan Burger.

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