Weekly Stocktake with Danyaal
3 March 2023
Key Indicators
| Index / Fund / Rate | Start of Year | Last week | This Week | % change YTD |
|---|---|---|---|---|
| JSE ALSI | 73 049 | 76 928 | 78 293 | 7.18% |
| NASDAQ Composite | 10 467 | 11 395 | 11 689 | 11.67% |
| S&P 500 | 3 840 | 3 970 | 4 046 | 5.36% |
| Prime Lending Rate | 10,50% | 10.75% | 10,75% | 2.38% |
| Lunar BCI WW Flexible Fund | 141,43 | 157.60 | 154.68 | 9.37% |
| USD/ZAR | 16,98 | 18.42 | 18.13 | 6.77% |
| EUR/ZAR | 18,44 | 19.44 | 19.29 | 4.61% |
| Brent Crude ($’barrel) | 85,95 | 82.81 | 85.93 | -0.02% |
Source: Iress
Can We Bank On It?
Last week, FirstRand released their results for the six months ending 31 December 2022. Normalised earnings for the group increased by 15% to R18 billion compared to the same period last year. Return on Equity (ROE) was 21.8% – at the higher end of their target range of 18%-22%. The strong increase in normalised earnings was primarily a result of new business origination in their portfolios, growth in deposits from both existing clients and new clients and a reduced credit provision from last year.
Let’s take a closer look at the two major segments of FirstRand (FNB and RMB), which made up 87% of their normalized earnings for the period. FNB earned R11.1bn during the period, representing a 17% increase over the previous year, while active customers for this segment increased by 5% to 11.22 million. FNB recorded an ROE of 42.9% which is also impressive. The credit-loss ratio (which is the total impairment charge per the income statement expressed as a percentage of average core lending advances) for FNB was kept low at 1.28%. This was done by primarily by targeting middle- to high-income customers. This customer group is typically better able to withstand interest rate hikes than lower-income customers.
During the period, RMB, which is FirstRand’s investment banking division, reported normalized earnings of R4.7 billion, representing a 28% increase over the same period last year. RMB achieved a ROE of 22.4% and maintained a credit loss ratio of 0.01%. The core advances for RMB rose by 25% compared to the previous year, with a focus on low- and medium-volatility sectors. Real estate accounted for 21% of the total core advances, while the other segments each ranged from 5% to 8% of the total advances.
Compared to the same period last year, RMB’s total drawn exposure to the renewable energy sector increased by 4.3%. However, the government announced, during the budget speech, that businesses could qualify for a 125% tax deduction for all renewable projects in the first year. RMB and other investment banks could benefit from these schemes as companies will likely seek financing for these projects.
Despite the weak macro environment in South Africa, certain companies like FirstRand are currently demonstrating strong performance. They offer essential services to people while also creating value for their shareholders. The performance of these companies could be dampened by the poor SA macro-environment unless these conditions improve or management successfully navigate through this.
FirstRand is held in the Lunar BCI Worldwide Flexible Fund
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