With bank profits essentially reliant on economic growth, analysts said yesterday that it was difficult to see how banks could continue to generate strong increases in earnings in the absence of strong growth in the economy.
Johann Scholtz of Afrifocus said with the exception of Absa, bank performances were probably as good as they were going to get given the current economic environment. “If the economy remains as sluggish as it has been, it is difficult to see where the revenue growth will come from.”
Scholtz said the impairments reported by both FirstRand and, last week, Nedbank were probably at the bottom of the cycle and could increase from these levels.
Tighter asset management and growth outside of South Africa would be needed to underpin continued growth in bank profits, analysts agreed.
Michael Jordaan, the chief executive of FirstRand’s FNB, said yesterday that although there was some growth in parts of the commercial market in general, “the economic environment is tough”.
Jordaan, who was speaking to Business Report after the release of FirstRand’s interim results, said the country needed higher growth and increased employment.
Asked how that could be achieved, Jordaan replied: “We need to implement the National Development Plan… yesterday. We have the best plan, now the issue is how to implement it.”
In the preamble to its results, FirstRand noted that despite weaker economic growth in the six months to December, higher inflation and a weaker rand, “credit extension registered double-digit growth for the first time in more than three years. Mortgage credit extension, however, continued to be weak and house prices remained under pressure.”
Helped by an 8 percent increase in FNB’s customer base to 8.5 million customers, FirstRand reported a 13 percent increase in gross advances to R575 billion and a 28 percent hike in impairment of advances to R2.5bn.
A 27 percent hike in unsecured lending contributed to the increase in advances.
The rise in bad debt provision is in line with bearish expectations and increased conservatism around unsecured lending. The increase includes R575 million of “credit impairment overlays” at FNB and RMB, “the creation of which reflects the group’s view that the benign credit cycle has bottomed”.
FirstRand chief executive Sizwe Nxasana told analysts at a presentation yesterday that all of FirstRand’s three franchises, FNB, WesBank and RMB, had reported excellent operating performances and had contributed to the 25 percent hike in diluted earnings a share to R1.28 from which the group would pay a dividend of 55c a share.
Nxasana said despite low gross domestic product growth and muted corporate activity, RMB had “captured good share” and increased pretax profit by 24 percent to R2.5bn.
The resilience of real disposable income during the period had supported “good growth in transactional volumes and deposits at FNB”, where pretax profits were up 18 percent to R5.8bn. “Strong consumer spending on durables” had underpinned strong advances growth in WesBank’s retail portfolios, helping to hike pretax profits 16 percent to R1.9bn.
The strong performances combined to lift the group’s return on equity to 21.9 percent from 19.5 percent. Jordaan said that FirstRand believed that a return on equity of 25 percent was achievable.
FirstRand firmed 4.44 percent to close at R32.20 yesterday.