File photo: Reuters

Johannesburg - As South Africa enters a rising interest rate cycle that will put more financial strain on consumers, FirstRand is focusing more on its African operations to diversify earnings.

After establishing commercial banking operations in Nigeria in January, the group said yesterday that it planned to have a greenfield operation and use the Rand Merchant Bank (RMB) platform. It had not ruled out acquisitions there.

RMB, FirstRand’s investment banking arm, benefited mostly from activities in the rest of Africa to grow its core advances book in the six months to December last year.

The investment bank more than doubled advances in the rest of Africa to R25 billion.

FirstRand has set aside R10bn to expand into the rest of Africa by starting in-country franchises where it does not have a presence or by growing organically and making small-to-medium-sized acquisitions.

As the group ventures into other African markets, it admitted that the domestic market was likely to become more challenging, even though the set of results presented yesterday showed resilience.

FirstRand achieved a 20 percent increase in normalised earnings to R8.69 billion and its normalised return on equity (ROE) rose to 23.4 percent from 22.3 percent. Return on assets improved to 1.97 percent.

The group hedged through the challenging operating environment and reduced bad debt below expectations and normal levels to 77 basis points.

However, it said the increase in interest rates this year could put it back to normal levels of between 90 and 110 basis points, but there was a risk that this could be higher.

In the period under review, FirstRand’s overall non-performing loans continued to decrease, with those in retail declining 8 percent mainly due to reductions in non-performing residential mortgage loans.

“We did say that our non-performing loans are cyclically low. We expect to start going up again,” chief financial officer Sizwe Nxasana said.

But even though increased interest rates might put a strain on consumers’ ability to service their debt, he said residential mortgage loans were unlikely to be affected the same way as unsecured credit. “The quality of our mortgage book is much better. Even if bad debt goes up, it will not increase to the levels seen in 2008, 2010.”

FirstRand posted robust growth in advances, mostly from cards, secured affordable housing and overdrafts at FNB.

The stock gained 1.51 percent to R35.01, in line with the JSE banks index. - Business Report