Johannesburg - It's all eyes on Sizwe Nxasana, CEO of FirstRand Group, with the major question pending being whether he can take the R92bn banking group into a new era.
This was after the retirement of Paul Harris earlier this month, a development that, though long expected, confirms the perception that FirstRand is at a crossroads.
"Paul Harris's retirement heralds a new era as FirstRand effectively becomes an institution," said Citigroup analyst Henry Hall in a note to clients last week.
FirstRand, with assets unbundled out of Anglo American in 1998, quickly established its entrepreneurial roots under Harris by building a retail footprint for its First National Bank brand and by giving Rand Merchant Bank a powerful investment banking presence.
Harris also unbundled the bank's stake in Discovery Holdings having first spotted the business potential of the healthcare provider. FirstRand also has Wesbank and Momentum in its stable.
Now, however, the challenge for Nxasana is whether he can match Harris for entrepreneurial endeavour. There is an estimated R5bn in FirstRand's kitty, and initial expectations are that some capital will go into Africa - Nigeria specifically.
But times have been tough lately. FirstRand reported a 30% decline in headline earnings to R6.9bn for the year ended June and cut the dividend 32%.
And problems at investment banking group RMB, particularly in its offshore and derivative trading businesses - resulting in trading losses of R782m - suggest the entrepreneurial culture and loose management style adopted by Harris at FirstRand may be unravelling.
During a recent results presentation, Nxasana and Harris reassured investors the group had learnt from its mistakes and had taken some drastic steps to de-risk it.
They said the bank was committed to its African strategy as well as growing its relationship with partners in India and Asia, moves viewed positively by analysts.
Hall said that Nxasana is highly rated but will have a "huge task" restoring FirstRand's return on equity (ROE) - the measure by which a company is assessed in terms of its ability to effectively use its capital - which has suffered over the last two years.
Part of improving the ROE for the group revolves around the high levels of capital and cash on hand that FirstRand has accumulated.
"For the first time ever, FirstRand has not only the highest Tier 1 and total CAR (capital adequacy ratio) in the peer group, but also an estimated R5bn surplus capital. It could thus pounce on attractive acquisition opportunities," he said.
Areas that have been mooted for potential corporate action for South African banks include opportunities in Nigeria and other rapidly growing African markets as well as building closer ties with Asian and Chinese banking groups.
FirstRand itself recently announced that it has entered into a joint venture with China Construction Bank, enabling the two firms to work together to explore opportunities on the continent.
RMB Holdings
In the meantime, investors may want to consider whether RMB Holdings provides a better entry point to FirstRand than the group itself.
RMB Holdings has a 33% holding in the FirstRand group and a 27% interest in financial services firm Discovery. It also has a 62% holding in direct insurer OUTsurance and an 80% stake in RMB Structured Insurance, which provides corporate insurance and risk solutions.
As with FirstRand, RMB Holdings also suffered a 30% decline in headline earnings. However, management at RMBH said the group's intrinsic value - the accounted value of the underlying investments - rose 7% to R30.3bn or 2 509c per share. On Monday, the RMBH share was trading around 2 700c per share, well above its intrinsic value.
Patrice Rassou, an analyst at Sanlam Investment Management (SIM), said higher earnings growth at Discovery was a boost for RMBH. "Discovery is the key for earnings growth," he said.
RMBH has also sold down its emerging market portfolio which had been investing in financial services businesses, primarily in India, Brazil and Turkey since 2006. The cash from exiting these positions was used to settle debt, a move Rassou described as "positive".
Said RMBH chairperson GT Ferreira: "Both Discovery and OUTsurance are well positioned in their respective market segments and should continue to extract superior growth there from.
"Their respective international initiatives should also begin to gain traction during the current year."
Barnard Jacobs Mellet (BJM) told clients RMBH was trading at a slight discount to its intrinsic value and "... is regarded as fair value at current levels".
It would retain FirstRand in its core equity portfolio and would continue to accumulate the counter below the 1 500c mark, BJM said.
On Monday FirstRand was up 0.6% (10c) to 1651c while RMBH was up 0.1% (2c) to 2 752c.
- Fin24.com