DUDU RAMELA: Financial services group FirstRand, which comprises FNB, RMB, Wesbank and Aldermore, today (September 16, 2021) announced results for the year ended June 30, 2021. Normalised earnings increased 54% to R26.6 billion. The group produced R4.9 billion in economic profit and a normalised return on equity of 18.4%.
Alan Pullinger is the CEO of FirstRand. Thank you very much for your patience with us, Alan. Commentators have characterised your results as impressive. Would you agree?
ALAN PULLINGER: Hi, good evening, Dudu. Yeah. It’s impressive, I guess, in the context of what we’ve been through, but really a function of a much lower credit charge in the income statement driving our earnings. And so we are very pleased with the way we’ve got here. It certainly surprised us on the upside.
Various companies typically try to calibrate their performance. They talk about getting back to peak earnings, and for many companies that were growing their profits probably their highest year of profit was somewhere in the 2019 year. And then of course the pandemic hit. So the market has been asking lots of businesses: “When are you going to get back to the levels you were in pre-pandemic?” That’s what we referred to, sort of ‘peak earnings’. For us it was the 2019 year.
With these results, we are back basically at 95% of those earnings, so we are just a little short. Again, it’s a credit issue that still needs to sort of normalise a little bit to where we expect it to be. But we do hope that imminently we will exceed that 2019 level of earnings. So we are pleased.
DUDU RAMELA: Let’s talk about specific growth strategies that the group undertook to strengthen the balance sheet. What results have they yielded?
ALAN PULLINGER: Well, I guess when you talk about the strength of the balance sheet, there are two things that one would look at. One is your capital ratio. We saw strong accretion of capital with these results. So really from a capital perspective I have to say we are sitting in a very healthy position.
The other aspect that people look at when they talk about a strong balance sheet is what provisions you’ve got for credit. Now, we basically increased our positions year on year – a slight reduction in the provisions from what you shared at the half year. But our provisions on the balance sheet are still very significant. So the pleasing thing for us there is not only is the balance sheet strong, but also we didn’t need those provisions to recycle in order to generate these returns. The returns [and the earnings that we had], so we are still sticking with the provisions.
We need the provisions of course, because when the pandemic started you will recall many banks offered what we refer to as sort of a ‘payment holiday’, some kind of payment deferral. And those books that we offered that relief on were large. Where is that book today?
Well, it’s definitely lower than what it was, but across the group we still sit with a book of about R160 billion, which is what we refer to as our relief book. That’s the book where we still need to hold customers’ hands, work through that process.
That’s all, as I say, a book particularly impacted by Covid.
DUDU RAMELA: Let’s take a look at FNB pre-tax profits increasing 32%, and return on equity improving to 33.3%.
ALAN PULLINGER: Yeah. They really were the engine in driving the group’s numbers. We are very pleased with our pre-provision profit – also impressive, I think, which is essentially looking at your operational profit before this credit debate comes into it. Pleasing to see that.
I think from an FNB perspective, what [stood] out was one, they saw customer growth over the period, pretty much across all of their segments, up about 5%. I think in this environment to grow your core transactional customers from a banking perspective up 5% if you’re a big bank, like we are, we think that’s a very impressive result.
I guess, customers are enjoying the experience that they have banking with FNB. There’s no doubt that those compositions are resonating, and a good indicator of that is how well the FNB brand did in the recent Brands [Finance South Africa] survey that was done in South Africa. So FNB didn’t just become the most valuable banking brand, but in fact they were the number one brand in the country.
So I think they’re getting a lot right. Of course we’ve got areas of improvement. It’s never done. But definitely that brand has gone from strength to strength and so we are very pleased with the performance of FNB. Great job.
DUDU RAMELA: What of RMB? How did the rest of Africa activities actually boost performance?
ALAN PULLINGER: I think, to be honest, in the context that they are facing they also did very well. Of course you must remember corporate South Africa, which is the bulk of their earnings, in some respects has been on the sideline; they sit with a lot of capacity; there hasn’t been really a reason for them to make more sort of productive investments. They’ve been very cash-flush. So you’ve seen corporate’s hoard liquidity and in fact some of that liquidity has gone into repaying lending that they had. So the wholesale lending book in RMB actually declined by 13% over this period.
Notwithstanding that, RMB posted in fact their highest-ever level of earnings.
They were helped by a some equity realisations in their number of debt [portfolios]. But I think a very good performance from RMB.
The business in the rest of Africa it performed well for them. Again, it was on the back of a reversing of provisions and there I think particularly relating to oil and gas. Those sectors are in a much better state than they were. I think RMB was able to reverse some of those provisions. So overall a good story. I think what took a little bit of a gloss off their regional results was the appreciation of the rand.
DUDU RAMELA: And finally Wesbank – were you pleased there?
ALAN PULLINGER: Yes. I think WesBank also had a decent rebound – that’s a much, much tougher market. If you look at new vehicle sales in South Africa, although they rebounded strongly this year you must remember how significantly they were impacted in 2020. So we are probably still tracking vehicle units that were last at these levels maybe eight years ago. I think a lower number of new-vehicle sales units, and each one of those is of course an opportunity for WesBank to finance – so I think a shrunken opportunity.
Number two, you’ve also got customers that have been buying down in terms of value of vehicle. That talks to the absolute level of financing opportunity.
And then on top of that you’ve got a very competitive environment. There’s no doubt some of the other banks that haven’t been well represented in that vehicle-finance space are trying to get in on the action. And so it’s a very competitive story at the moment. So I think good for customers. But if you remember, it’s hard work to keep up with the natural repayments that happen in your book. So WesBank is running hard. Recent performance tells us that I think they’re on top of the game. They’ve sharpened their pencil, and they’re out there writing as much business as they can, but I think it’s still going to be a couple of years of a tough sector.
DUDU RAMELA: All right. With an impressive sets of results, what is the outlook for FirstRand?
ALAN PULLINGER: I guess when shareholders look at our earnings there are two things they look at: what sort of growth rate we can expect to our earnings and then also what return profile we should generate. So basically our returns are back into our target range of 18 to 22%, and we posted 18.4%. We hope that we can at least hold that or hopefully slightly improve it. And then I think from an earnings perspective we are a large systemic bank and so growing our earnings is somewhat anchored to what happens to the economy. But we do talk about sort of an aspiration to grow at more than the nominal returns coming out of the economy. So real GDP plus CPI, if you add those together and it would be great if we could add a percent or wo on top of that. So that’s sort of our long-term aspiration. Of course, we always try and do much better than that, but that would be a good sense of where our mindset is for the next the next sort of medium period.
DUDU RAMELA: Alan, congratulations and thank you very much for your time this evening. Alan Pullinger is the CEO of FirstRand.