FirstRand said on Thursday it would not pursue growth at the expense of returns as the group reported increased annual earnings of 7% to R24.4 billion that were below market expectations, hamstrung by credit impairments that grew 13% in the period.
Johan Burger, the chief executive of FirstRand, said that the group would continue to exercise discipline in allocating capital and strike the right balance between growth, prudent risk management and investment for growth.
“We do, however, expect the macroeconomic environment to continue to be characterised by low domestic demand, pressure on personal incomes and possible further rating agency downgrades and this will create headwinds for top line growth in the group's domestic franchises in the current financial year,” Burger said. The group said it had scaled back expansion elsewhere on the continent due to growth prospects having been dealt a blow by the collapse of commodity prices. However, the bank said it would expand its businesses in nine countries where it had a presence already, including Mozambique and Zambia.
The bank said it also expected credit extension to be constrained in the next two to three years as it adjusted credit appetite in the high-risk segments of the retail market. For the year ended June, FirstRand's normalised earnings grew 7% in the period, supported by First National Bank (FNB), which grew its normalized earnings by 5% to R12.9bn, accounting for 53% of the group’s total earnings.
The company’s subsidiaries Rand Merchant Bank (RMB) reported an increase of 11% in normalised earnings to R6.9bn , while Wesbank’s earnings grew 2% to R3.9bn. First Rand said its dividend per ordinary share went up 13 percent in the period, while its normalised return on equity (ROE) was reported at 23.4%.
The group’s impairment charge went up 13% from R7.1bn in the comparative period to R8bn in the period under review. Renier de Bruyn, an investment analyst at Sanlam Private Wealth, on Thursday, said that First Rand was arguably the best managed of the country's big banks and earned a superior return on equity.
“Bad debt ratios deteriorated in 2016, as consumers came under pressure as a result of poor economic growth, while low commodity prices and the drought stressed the balance sheets of affected industries” “However, these time earnings were shielded by the gradual interest rate hikes of the preceding two years, which lifted the net interest margins of the banks,” de Bruyn said.
Earlier this year, ratings agency S&P Global Ratings (S&P) said the high indebtedness of South African households posed the most significant risk to the country’s banks this year due to their relatively high leverage and wider income disparities compared to other emerging markets. The rating agency had noted in its research note that the declining affordability of South African households could best be illustrated by the debt service-to-disposable income ratio, which increased to 9.3% in 2015 from 8.7% in 2012.
FNB reported a pre-tax profit of R18.8bn, but its rest of Africa operations reported a 32% decline in profits. RMB said that its profits grew 10% to R9.8bn, while Wesbank reported a 2% increase in profits. Burger said the group’s sub-Saharan growth rates were expected to show a recovery over the next twelve months and this should be supportive of the rest of Africa portfolio.
“Despite these macro challenges we remain committed to our current investment cycle, and we are very focused on driving efficiencies and managing core costs. The group aims to deliver real growth in earnings and a return on euqity near the upper end of its stated target range of 18% to 22 percent.”