FirstRand waiting on RMB rebound

2010-03-09 09:22

Johannesburg - FirstRand [JSE:FSR] produced almost unchanged interim earnings. The expectation is that the group's longer-term fortunes would be driven by a powerful rebound in Rand Merchant Bank (RMB), its corporate and proprietary banking business.

Earnings at banking group FirstRand rose 1%, and management expected a "subdued" second half to its financial year.

In commentary to its results, Sizwe Nxasana, FirstRand CEO, told shareholders: "The anticipated modest growth in the South African economy will be driven mainly by further investment by government and some improvement in consumption levels."

"Whilst this will not drive significant growth in advances, as levels of consumer indebtedness are still at historic highs, FirstRand does expect this increased economic activity to benefit its banking franchises," he said.

Earnings at the group rose 1% to R4.6bn for the six months ended December. The interim dividend was unchanged at 34 cents per share.

Banking operations at the group - which comprise First National Bank (FNB), Wesbank and Rand Merchant Bank (RMB) - contributed the lion's share of the earnings, delivering R4bn in profits.

Insurance operation Momentum produced R850m, while there was a R283m accounted loss at FirstRand operations following distributions to shareholders.

A pleasing sign for the entire banking industry is that overall impairments decreased 13% from R3.7bn to R3.2bn. FirstRand attributed this decline to signs that the interest rate cutting cycle is finally being felt by consumers.

RMB bounces back

Predictably, clues as to FirstRand's future performance fell upon RMB, which has suffered the effects of a turbulent 24 months.

During this time, RMB suffered large offshore equity and proprietary trading losses and defaults related to derivatives trader Dealstream in 2008.

Now, however, a rebound in earnings at RMB is expected to drive the performance of the group over the next two to three years.

It posted interim taxed profit of R1.4bn, some 26% lower than the prior year, but a "significant" improvement after dropping 49% in the second half of the previous financial year.

RMB's performance was "mixed", said Nxasana who added that investment banking operations had seen improved deal flow and were starting to see the benefits of a commercial relationship with China Construction Bank and FirstRand India.

Said Nxasana: "The equity trading division returned to profitability as a result of the de-risking of the international portfolios, as well as a strong performance from the local agency and trading businesses."

FirstRand's expansion strategy is also expected to attract analysts attention. After being burnt offshore at RMB, there is an expectation that there will be a far more low-risk strategy employed.

The group was upping its exposure in Nigeria amid distress in the Nigerian banking system towards the end of 2009, Nxasana said.

Other countries on the radar for FirstRand include Zambia, Mozambique, Tanzania and Angola, he said.