First National Bank (FNB), whose 27 percent hike in pretax profit to R8.3 billion played a major role in boosting FirstRand’s earnings by 26 percent, will restrict growth in unsecured loans this year.
During the year to June, FNB, which recorded a 1.3 million net increase in accounts, lifted unsecured retail lending by 22 percent off a low base. This compared with the 3 percent increase in secured retail lending.
Highlighting the continued strength of consumer spending, WesBank, which provides asset-based financing, was also a major contributor to FirstRand’s strong performance, reporting a 43 percent hike in pretax profit to R3.6bn.
FirstRand’s 26 percent increase in normalised earnings a share to R2.26 was ahead of most analysts’ expectations of around 20 percent.
The increase, achieved despite the 8 percent drop in pretax profit at Rand Merchant Bank, sees FirstRand continuing to lead the performance rankings of the big four banks.
The group achieved a 20.7 percent return on equity and a 1.73 percent return on assets, a measure that Johan Burger, Firstrand’s chief operating officer, describes as “the truth” in banking.
The dividend was increased by 26 percent to R1.02 a share.
The exceptional performance achieved in the year under review benefited from FirstRand’s more vigorous approach to bad debt provisions in previous years. But despite this more vigorous approach, South Africa’s second-largest bank reported a 27 percent increase in “impairment of advances” to R5.5bn.
The total impairment charge increased from 0.93 percent to 1.08 percent of advances with all of the upward pressure coming from unsecured retail lending. In addition, the group’s management took the opportunity of the strong results to take a once-off “special impairment charge” of about R700 million, which was equivalent to 0.14 percent.
This special charge related to negligence and collusion in FNB’s card division, which resulted in credit card charges not being debited to customer accounts.
FNB chief executive Michael Jordaan said that the write-off was attributable to negligence and a subsequent cover-up by employees over a four-year period. He stressed that there was no fraud.
On the prickly issue of unsecured lending, Jordaan described the 22 percent increase as a defensive move to protect the bank’s customers from aggressive moves by micro-lenders who charged considerably higher interest rates than the major banks.
Jordaan said the growth in unsecured lending, provided in the form of overdrafts, consumer loans and credit card facilities, “is a big topic for us and for the credit regulators”.
He added: “As a responsible lender we are not concerned in terms of our overall balance sheet but the rate of growth is not necessarily comforting and is not sustainable.”
FNB’s concern was that non-bank lenders such as furniture retailers and microfinance lenders were fuelling the credit bubble as they had preferential access to the bank accounts of their customers through the early debit order system. Preferential access means that a loan for clothes or furniture is honoured before a home loan.
The 22 percent hike in unsecured lending compares with the 3 percent rise in secured loans and the 7 percent overall rise in advances by FNB.
FirstRand was forecasting “advances and profit growth at lower levels” in financial 2013 as well as a gradual increase in impairments in retail portfolios, the group said.
Shares in FirstRand added 1.1 percent to close at R27.55 on the JSE yesterday for a market capitalisation of more than R155bn. The JSE banks index gained 0.37 percent.