Internally, FirstRand (owner of franchise FNB) reckoned it would take “three years to get back to 2019 numbers” says FNB CEO Jacques Celliers. In reality, it took two.
The banking group reported normalised earnings 12% higher in the six months to December 2020 than in the corresponding period in 2019.
Covid-19 is now firmly in the rear-view mirror.
The group has “emerged in good shape”, something Celliers describes as an “unbelievable performance”. This is a financial services business firing on all cylinders; every metric is favourable.
And, it hopes, things are going to get better. In the short term, private sector confidence is recovering, demand for credit is returning and government’s demand for credit is slowing. This means that, in the short term at least, the environment is positive. In other words, “the cycle is supportive”.
Russia’s invasion of Ukraine is obviously cause for concern, and the bank’s economists and analysts are still working to understand how its impact could translate into our economy. Celliers says we’ve had a “very strong windfall from high commodity prices” and this is likely to continue given the current situation. To some extent, this will offset some impacts (such as higher oil prices), but “it is going to be inflationary”.
“[Increases in] Interest rates might come at us a bit faster.”
Beyond this war and the short-term cyclical tailwinds, Celliers is confident the structural reforms being undertaken by President Cyril Ramaphosa’s government will provide a “reset” to the growth and GDP potential of the country. He says even if these are moderately successful, we’ll have a nice “breeze from the back”.
Insurance and investment products
The banking group has been scaling up its insurance and investment operations to ensure it isn’t wholly reliant on transactional revenue and interest income. Already, these contribute R5.6 billion in income annually. This equates to 12% of annual non-interest revenue.
It’s doubling down on these two areas “given [the] pressure on transactional revenue from increased competition and potential regulatory intervention”.
Insurance is the biggest portion of this push and is running at just under 10% of non-interest revenue.
The group now offers a full suite of retail life and short-term insurance products under its own licences. Previously, it used businesses formerly housed in the group (such as Metropolitan) to offer insurance to clients.
It says FNB Life is now the third-largest insurer in its retail customer base – and it would know, given that it processes all debit orders. Over 6.8 million lives are covered which suggests significant penetration into its transactional banking base. At the end of last year, it launched car and household insurance, which will be another growth vector.
It has been deliberately lending to better quality clients, which has certain consequences. Celliers say this results in a “better quality book” with “much less volatility” but that the bank “can’t charge as much” for this shift to better credit. This translates to a “lower margin on better risk”. This credit also tends to “turn faster” as it won’t likely run to term (even with home loans, and the bank has had to transform its cost base to be able to make sure the book is still profitable at these “different margins”.
Customers continued to grow, with retail clients up 3% and commercial growing at an even stronger pace (5%). Its total customer base is up 3% at 10.69 million (including its operations on the rest of the continent).
It says its eWallet customers (many of whom are likely to be customers) are up 6% to 5.95 million.
The banking group reported normalised earnings of R15.7 billion, with pre-provision operating profit of R26.4 billion. It declared an interim dividend of 157c per share, with an expected improvement on its return on equity (20.1%) and a credit loss ratio (0.61%) that is incredibly low in historical context.
Looking ahead, its baseline scenario is that “global growth improves gradually”.
“Developed market inflation lifts but remains low by historical standards and global interest rates remain accommodative. The South African economy continues to show a slow recovery. Inflation continues to lift but remains within the SARB’s target band.”
This was formed in an environment before Vladimir Putin decided to invade Ukraine.