Can We Bank On It? – Weekly Stocktake with Danyaal

Can We Bank On It? – Weekly Stocktake with Danyaal

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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Disclosures
Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/
Our Privacy Notice: https://lunarcapital.co.za/privacy-policy/
The Lunar BCI Worldwide Flexible Fund Fact Sheet  can be read here.
This roundup is prepared for the clients of Lunar Capital (Pty) Ltd. This roundup does not constitute financial advice and is generated for information purposes only.
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Every Wednesday, at 07h45, Sabir chats with Nazia from Eastwave Radio (92.2 fm, live stream on
www.eastwave.co.za) on investing and the markets.

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