In Mary Vilakazi’s maiden results as FirstRand CEO, the group remains as robust as ever.
Back in 2017, FirstRand bought Aldermore Bank in the UK, through which it generates hard currency sterling income. This plays a role in its premium rating.
Vilakazi pointed out in the results presentation for the 12 months to June 2024 that its (relatively modest) African portfolio was affected by the IMF/World Bank structural adjustments in some of its African markets. With a much smaller footprint outside Southern Africa than Standard Bank or Absa, FirstRand was much less affected by the high inflation in Ghana, Zambia and Nigeria. FirstRand doesn’t even have a commercial banking licence in Nigeria, just a merchant bank licence for its corporate and investment banking subsidiary, Rand Merchant Bank (RMB).
This is by no means just a postbox, however, as RMB’s earnings from Nigeria increased by 76% in naira on the back of strong deal flow facilitation and market-making opportunities.
Inflation was much in line with South Africa itself in the Southern African region in which FirstRand operates as a universal bank under the FNB brand — Namibia, Botswana, Eswatini, Lesotho and Mozambique. And Namibia (up 27%) and Botswana (up 31%) both provided strong pretax profit growth for RMB. Vilakazi tells the FM that FirstRand is always looking at inorganic opportunities (acquisitions) in Africa — RMB is already benefiting from a “broader Africa momentum”.
The business is, nonetheless, focusing quite actively on organic growth, increasing its FNB agency banking footprint in broader Africa by 21% to more than 4,300 CashPlus agents.
Vilakazi’s first big headache, ironically, comes from the stodgy, dependable UK market. Investec had already made a provision for the UK motor commission review when it announced its annual results back in May. But retail vehicle finance is a tiny market of Investec Bank’s British lending book.
This time around we thought it was appropriate to shine a light on our little-known progress in Islamic banking in South Africa
— Mary Vilakazi
For Aldermore, in contrast, vehicle finance — sold under the MotoNovo brand — is one of the key four lines of business, alongside property finance, structured and specialised finance, and savings. Vilakazi says the inquiry will affect commission levels paid to intermediaries such as dealerships for introducing business since 2007. Aldermore will be responsible for any customer detriment, if proved, from 2019 to 2021.
The provision for any findings of irregular commission payments is material at R2.4bn after tax, and this includes R220m for legal and professional fees. Vilakazi says FirstRand needs to be prepared in case there are further legal actions against banks, though she is confident Aldermore and MotoNovo operate to the highest possible standards.
The new CEO was previously in charge of the nonbanking interests at FirstRand. And one of her first acts at the helm has been the effective closure of the Ashburton Jersey business. This was one of the quirkier acquisitions by the RMB founders when they bought what was then Jersey General.
It had a good franchise in the days of tight exchange control for people who were looking for a wealth manager to manage overseas wealth. “We decided that for an organisation of our size, a working relationship with a large international manager was more fit for purpose,” says Vilakazi. “And that’s why we recently announced that Morgan Stanley Investment Management would be running our main global equity fund, the Ashburton Global Leaders Fund.”
Ashburton, FirstRand’s institutional fund manager, did not get a mention in the FirstRand results. “We can’t highlight all the activities in this very large group every time we present,” says Vilakazi. “This time around we thought it was appropriate to shine a light on our little-known progress in Islamic banking in South Africa, in which we now have a 62% share of deposits.”
Ashburton Jersey, and even Islamic banking, will barely move the needle when it comes to the FirstRand share price and can’t explain why it is on an earnings multiple of 12.3 and Standard Bank, a blue chip which is also well run, has a multiple of 8.9.
One indicator, above all others, accounts for FirstRand’s premium rating. This is net income after cost of capital. Its weaker rivals such as Absa wouldn’t draw attention to the figure because, in their case, income is often below the cost of capital, according to Ninety One’s veteran bank analyst, Chris Steward.
In the year to June 30 2024, FirstRand generated an impressive R10.36bn in excess of its cost of capital. Yet it was by no means an exceptionally good year for FirstRand, better known by its divisions FNB, RMB, WesBank and Aldermore in the UK than in its own right. Earnings increased by a modest 4% to R38bn. The cost to income ratio increased slightly to 52.6%, a metric in which it is not as strong as Standard Bank, which is below 50%.
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