A standout financial performance by FirstRand in the second half of the year to June 30 enabled it to grow normalised earnings by 4% as well as absorb a R3 billion provision raised for a UK Financial Conduct Authority review of UK motor commissions, CEO Mary Vilakazi said yesterday.

The investigation relates to whether consumers in the UK were overcharged on vehicle loans due to the open commission model by motor dealers between the years 2007 and 2021. In the UK, FirstRand owns Aldermore, a UK specialist lender, which includes MotoNovo, a vehicle finance business.

Vilakazi said in an interview that the UK’s FCA was at this stage of their investigation awaiting the outcome of some related court cases, before concluding its review, and she expected the investigation might conclude in April or May next year, and either way there would be some uncertainty about the outcome until then.

She said the 4% normalised earnings growth was strong given the R3bn provision and the high level of retail banking impairments at FNB due to the high interest rates, which reduced FNB’s earnings.

Vilakazi said excluding the UK provision, normalised earnings grew 10% and the return on equity (ROE) of 21.3% moved to the top of the targeted range.

She said the ROE of 20.1% had also remained well within the group’s target range. She said the group, which also has RMB and WesBank as key subsidiaries, produced a strong operating performance, particularly in the second half.

The high ROE and ongoing capital generation meant the dividend could be lifted 8% to 415 cents per share, which was significantly higher than earnings growth.

She said they were cautious about prospects for the new financial year on retail banking credit, because while the group believed interest rates might decline by some 75 basis points to January, this still left the repo rate at 8.25%, quite a bit higher than the 6.75% it was at before the pandemic.

However, the group would benefit from better non-interest income growth, better transaction activity, growth in insurance and private equity and good cost management.

The strength of the customer-facing businesses in FirstRand’s portfolio had enabled it to continue to capitalise on profitable growth opportunities across all markets, sectors and segments, despite the challenging macroeconomic environment, she said.

“FirstRand remains discerning in pursuing advances growth, given competitive actions in the market and the higher interest rates, and believes it is still capturing a higher share of quality risk business whilst satisfying the needs of customers,” she said.

Growth in certain retail advances portfolios had slowed given customer affordability pressures but, on a year-on-year basis, still delivered healthy increases, with retail advances up 6% at both FNB and WesBank.

Advances growth from FNB’s commercial segment (+12%), RMB (+11%) and FNB broader Africa (+7%), reflected origination strategy to focus on sectors showing above-cycle growth. These were expected to continue to perform well even in an inflationary and high interest rate environment.

FNB grew advances to SMEs 18% and is the largest lender to SMEs. Vilakazi said this was the result of work through the years to improve banking to the SME sector, such as improved credit scoring and other technology and service improvement related initiatives.

In the past year the 1% growth in UK operations’ advances (in pounds) reflected the challenging inflationary and interest rate environment, despite resilient new business production from the property portfolio, which grew faster than competitors.

Across the portfolio, deposits and transactional balances increased strongly – FNB remained the largest custodian of retail and commercial deposits in the country.

Relatively muted growth in FNB’s fee and commission income was due to sub-inflation fee increases across both retail and commercial accounts.

Also, with the introduction of PayShap, FNB reviewed its pricing structures for low-value real-time payments and took the decision to reduce all related fees and absorb the entire impact of the repricing in one financial year. This resulted in nearly R1bn in fee reductions.

A resultant 34% increase in real-time payment volumes that FNB had already experienced since the repricing action, demonstrated this was the correct outcome for customers.

The group’s credit performance continued to play out better than expected. The credit loss ratio at 81 basis percentage points was still below the midpoint of the through-the-cycle (TTC) range of 80 bps – 110 bps.

This performance reflected the benefit of the group’s approach to origination, particularly post the pandemic ,when new business was weighted towards the low- and medium-risk categories and was achieved.

Total group operating expenses were tightly managed in particular at FNB where costs only increased 1%. This was, however, offset by elevated investment spend at RMB as it continues to build out its digital offerings and geographic expansion.

“Whilst absolute advances growth from the South African franchises is expected to exceed the year under review, this growth will continue to be tilted to commercial and corporate,” Vilakazi said.

BUSINESS REPORT