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FirstRand CEO Johan Burger has weighed in on the growth versus returns debate, saying that the banking group delivered a “very good outcome” for shareholders despite macroeconomic challenges. He told Moneyweb that any company’s performance should not be viewed as one-dimensional. “Growth on its own, without delivering a good return, is not a good outcome for shareholders. A combination of a high return and growth is a good outcome,” he said. For the financial year ended June 30 2016, the group reported an 8% increase in diluted normalised headline earnings per share to R4.074 cents. It lifted the dividend by a similar margin to R2.26 cents per share. Return on equity slipped to 24% from 24.7%. “We believe the combination of an 8% growth rate and return profile of 24% is a very good outcome for our shareholders, given the tough macroeconomic environment we experienced in the past 12 months,” Burger said. He said the group is confident it can maintain its dividend payout ratio within the 1.8x to 2.2x range even in the face of deteriorating macroeconomic conditions. “We do not want to move that cover range if we do not believe it is sustainable in the long term. Yes, there are elevated risks in the macros. Yes, there are regulatory changes coming at us but we are still very comfortable that we can keep the payout ratio at 1.8x,” he said, noting that even the bottom end of that range is most aggressive relative to its peers. For the period under review, growth in advances and deposits saw the group’s net interest income (NII) rise by 13%. Non-interest revenue (NIR) or fee growth rose 7%. “Revenue surprised positively as margins had widened with moderate asset growth. The silver lining was the NIR growth which highlighted the strong customer franchises. This was amidst headwinds of interchange fees and a shift to cheaper electronic channels,” said Neelash Hansjee, a banking analyst at Old Mutual Equities. Simbarashe Chimanzi, a banking analyst at JM Busha, flagged cost containment “especially during periods of decelerating earnings growth” as a concern. “FirstRand’s cost to income ratio ticked up from 50.5% to 51.1% with total operating costs growing at 11% ahead of the top end of the inflation band at 7%. We expect this figure to revert back to 50% in the short- to medium term when the Insurance and Asset Management franchises are fully established,” he said While the group’s impairment ratio increased to 86 basis points (bps), it remains below the group’s through-the-cycle charge of 100 bps to 110 bps, Burger said. Among its constituent divisions, First National Bank (FNB) reported an 8% increase in pretax profit to R17.86 billion. “This performance was again driven by FNB’s ongoing strategy to grow and retain core transactional accounts, use its customer relationships and data analytics to effectively cross-sell and up-sell into the customer base whilst applying disciplined origination strategies and providing innovative transactional and savings products,” the group said. FNB’s cross-sell ratio increased to 2.65 from 2.55. It said the increase in non-performing loans (NPLs) to 3.03% from 2.63% was in line with expectations given the prevailing economic cycle. Pretax profit at Rand Merchant Bank rose 10% to R8.9 billion, driven by the strong performance of the investment banking and advisory activities as well as corporate and transactional banking activities. WesBank reported a 20% increase in profit before tax to R5.5 billion, supported by a more diversified portfolio, which includes the 2015 acquisition of MotoVantage and a solid performance from its United Kingdom business MotoNovo. Burger said macroeconomic conditions in the next 12 months are likely to be more challenging. Although the group is working with government to prevent a sovereign ratings downgrade, he said the market has put the probability of a downgrade close to 80%. As such, FirstRand has implemented a number of measures to lessen the impact of a potential downgrade on its business. Such measures include investing in collections capacity to deal with a deteriorating credit cycle; taking on lower-risk new business; upping its provision levels; joining European clearing house LCH in order to gain an investment grade counterparty status to trade through exchanges; and prefunding business requirements in international markets, explained Burger. |
