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South Africa’s largest bank (by market capitalisation) is set to report interim results tomorrow.
Earnings per share on an adjusted basis for this first half of 2017 are expected to be between 7.4% and 10.3% higher than the comparative interim period (first half of 2016), with a realisation of double-digit growth likely to see a favourable term reaction by the market; should the results fall towards the lower end, or below this earnings range, this is likely to be met with short-term disappointment.
FirstRand currently trades at a forward price to earnings multiple (P/E) of around 12 times, which places the group at a basic valuation premium to that of its major banking peers: Barclays Africa (forward P/E of 8.2); Nedbank (forward P/E of 10.1); and Standard Bank (forward P/E of 10.3).
Historical earnings growth over the last few years has surpassed that of the group’s aforementioned sector peers and markets will be looking to see whether the group is maintaining this superior earnings growth to justify the more expensive pricing, particularly as the group offers a lesser (although still healthy) dividend yield than its competitors.
The transactional business (non-interest income) will remain a key focus for investors. In the groups 2016 financial year results, non-interest income accounted for more than 45% of group income despite interchange headwinds. Markets will be hoping to see further strength in this department as the lending environment, which makes up the bulk of group income, becomes vulnerable for the company and the sector in lieu of the current muted state of economic growth to which banking returns are linked.
South Africa’s leading innovative bank has consistently produced a return on equity (ROE) in excess of 20% and we hope to see this type of return maintained for investors. Despite the group’s historical best-in-class performance in a number of areas, slow economic growth in South Africa, combined with the threat of a credit ratings downgrade later in the year, suggests that at current levels, FirstRand may be trading at a fair value right now – that is unless we see a significant beat on the group’s earnings expectations for the interim period.
