• FirstRand Limited maintains earnings expectations despite challenging economic environment.
  • Resilience of customer-facing businesses and disciplined allocation of resources contribute to ROE.
  • Credit loss ratio expected to remain below stated through-the-cycle range.

Sandton- FirstRand Limited, one of South Africa's largest financial institutions, has released a voluntary trading update for the six months and the year ending June 2023. Despite a challenging operating environment marked by persistent inflation and interest rate hikes, the group's expectations for full-year earnings and return on equity (ROE) remain unchanged.

FirstRand Limited, through its portfolio of integrated financial services businesses, operates in South Africa, certain markets in sub-Saharan Africa, the UK, and India.

The South African macroeconomic backdrop has weakened during the second half of the financial year due to higher levels of load shedding, sticky inflation, and a steeper than expected rise in interest rates. As a result, the group has reduced its GDP growth forecast for calendar 2023 to a contraction of 0.1% and believes there remains a strong likelihood of further rate hikes. Markets continue to react negatively to the government's stance on the Russia/Ukraine conflict, adding to SA's country risk premium. Bond yields have increased, and the rand remains vulnerable.

First Rand Simplified group structure

Source : First Rand Annual Report

Despite these headwinds, the group's ROE is expected to remain at the upper end of the stated range of 18% to 22%. The group attributes this to the resilience of its customer-facing businesses, ongoing positive momentum in its deposit gathering activities, and the disciplined allocation of financial resources, particularly its targeted origination strategy adopted during 2021 and early 2022.

Net interest income (NII) has benefited from growth in customer deposits and the positive endowment impact resulting from the higher rates. Non-interest revenue (NIR) growth is slightly ahead of management expectations, with fee and commission income at FNB aided by fee increases in July, higher inflation on commission income, and good customer growth. Costs continue to trend significantly higher than inflation due to increased incentives given improved performance, higher dollar- and pound-denominated spend, headcount increases, and ongoing investment in growth strategies.

As previously guided, the group expects its credit loss ratio for the year to remain below its stated through-the-cycle range, given its targeted origination approach. The group's capital and liquidity levels remain strong and above internal targets.

Despite the challenging economic environment, FirstRand Limited's commendable performance is a testament to its customer-focused approach and disciplined allocation of resources. Shareholders may want to keep a watchful eye on the ongoing impact of macroeconomic factors on the company's performance while management has to engage cost containment measures to help preserve shareholder value in this volatile environment.

-Equity Axis News