FirstRand reported a 4 per cent rise annual normalised earnings and hiked its annual dividend by double. Earnings could have been better had it not been for the R3 billion the lender set aside to cover the potential impact of a UK investigation into vehicle loans and the rise in bad debts across its FNB, RMB and WesBank division. CNBC Africa is joined by Mary Vilakazi, CEO, FirstRand.
FirstRand reported a 4 per cent rise annual normalised earnings and hiked its annual dividend by double. Earnings could have been better had it not been for the R3 billion the lender set aside to cover the potential impact of a UK investigation into vehicle loans and the rise in bad debts across its FNB, RMB and WesBank division. I'm now joined by Mary Vilakazi, CEO of FirstRand for more on the numbers. Ma'am, thanks so much for your time. Perhaps let's start off with what happened in the UK. Just given the fact that you do say that the earnings picture could have looked a lot better had it not been for that probe, understanding and respecting the sensitivity of matters, can you tell us how that process is going by the UK Financial Conduct Authority? Thanks very much, Fifi, and thank you for having me on your show. The UK FCA, which is their conduct regulator, announced that they were going to step in and review the finance motor sector. And I guess if one goes back to just what the origin of the review is, they're looking into motor commission practices in the UK, something that the FCA itself have looked at in the past, that in 2021, alongside also with Australia, they looked at these practices and they said this practice of commission being linked to the interest rate that customers pay could have customer detriment. And I think they came up with regulations that said going forward, financiers were not allowed to do that, and which we have complied with. We've also actually implemented in West Bank, although in the South African market, this is still a practice that is prevalent. But we also agreed that I think if something could result in customer detriment, that is not a place that we should participate in. And then what started happening, Fifi, is that a lot of the claims management companies then took up cases where they said to customers that, OK, well, if this was permitted, if this was not outlawed, you could have been, I think you could have overpaid. And I think there's a lot of those cases that have gone through the courts. We've had to defend a lot of the cases that have come our way. And we've, in more than 70 percent of the cases, I think the courts have ruled in our favour. So, you know, I think it's quite complex. Obviously, different financiers have got their own practices. You know, you've got different dealers with different practices. So, we welcome the UK FCA having, I think, taken charge of this review. But at this point in time, we are awaiting their feedback back to the sector. And I think that's going to be in the second half of our financial year. So, I guess, as you correctly pointed out, we took a provision which we believe is conservatively struck, I think, just so that, you know, we can have a large portion of this uncertainty behind us as we go into the new financial year. Sure. And I think that investors also welcome the transparency of the group in the process. I mean, you have outlined how much you've spent on legal fees so far and also the transparency around the provision. So, Mary, you're saying that you are, fingers crossed, hoping that this process is wrapped up in the second half of the year. I'd just like to understand the thinking in the group behind an unfavourable finding against the first round, notwithstanding the fact that you have said that 70 percent of the cases have already gotten your way. But in the event that the final case doesn't, what then? I mean, is the provision sufficient or could further decisions need to be made? Yeah, Sophie, I think this is where a lot of the uncertainty lies, because from all the reviews that we have undertaken internally, the FCA themselves appointed an independent person and independent experts to review some of our practices. That draft report has been submitted. We've looked at it, given comments. But even in there, there's no wrongdoing. So, yeah, Sophie, it's quite a long road to travel to get to a place whereby we can even consider what happens with wrongdoing, because we have to first be able to define what is this wrongdoing. So, I mean, when we raise a provision, we can look at it and say, OK, maybe how have the outcomes been for the consumers? Where do we think there could have been detriment? You know, we look at that and we think, OK, there's no detriment, but OK, let's just assume that's the cohort. I mean, that's how we've estimated the provision. So, I think still quite a long way to have any kind of clarity on what's going to transpire, because it's really there are many different perspectives here. And I think the UK regulator is also quite aware of the wider implications on the finance sector in the UK. And I do think that the decision that gets taken will be a measured one. So, but the group as a whole reporting growth and just looking at the performance of your UK operations, you're reporting a 25 percent increase in normalised earnings. Could have been better outside of this probe, but I think that 25 percent is not a shabby performance nonetheless. So, maybe talk to us about outlook then for this part of the market outside of this probe. We've seen inflation over in that territory coming down. We've also seen central banks making moves lower on interest rates. Just how are you feeling about this part of the world in light of potential tailwinds for your business? Yeah. So, I mean, I think I'm pretty pleased about the performance of a small business in that very big market. I think as a specialist lender, their credit experience speaks to the fact that, you know, I think that they've got strong underwriting skills. They understand the part of the market in which they play, providing very bespoke solutions. So, you know, we think that there's room for growth for Aldermoor in the areas in which they focus in. And I think, you know, there's also, I suppose, an improvement that we could also get in that performance because one of the businesses that has not really had, I think, an environment where it could perform well is a Motonova business. You know, I think, firstly, we have had a remediation that was underway over the last couple of years, and now I think the overhang on the sector. So, I think once the, yeah, I think with interest rates coming down, with inflation coming down, you know, that should hopefully be a more supportive environment for UK consumers. Hopefully, we can see demand come back again for property and business lending. But, yeah, but in general, that business is in good shape, and I really think that they are capitalising on the opportunities that the markets present themselves. I mean, just as context, and I suppose reorientation, that UK business is about 10 per cent of the group earnings, about 20 per cent of our balance sheet, which is large. Broader Africa portfolio contributes between 10 per cent. So, Fifi, we are still largely a South African business, you know, 80 per cent of our business is here. And I think in terms of outlook, you know, we are quite constructive with the outlook for the cycle for the corporate and the commercial sector. I mean, I think a lot of the structural economic reforms speak to those themes. And on the retail side, I do think that when inflation comes down, and hopefully the SAAB reduces rates, there will be relief for consumers. We're not anticipating that that's overnight going to change the shape of our credit experience. I think it's going to take time. If we see the 75 basis points cut that our house view is predicting over the next 10 months, that takes the repo rate to 7.5 per cent. That is still considerably higher than the rate we saw pre the pandemic. So, yeah. So, Fifi, that will provide some relief for the retail, for households and retail consumers. It should improve the credit experience for F&B. But, you know, I think this cycle, we're not calling it, we're not calling it yet. And I think we remain quite cautious. But I mean, I guess what we have done during this period is really be consistent in our focus on lending to low and medium risk customers. So, you know, that's something that we'll continue doing. And hopefully, improved affordability means that we can do more with, you know, more with those customers with affordability. Okay. So, which was going to be my next question, just the outlook around the credit experience, because I mean, this is something that also comes out in the numbers, the bad debts that have been registered this time around from F&B, R&B, as well as the West Bank. You've answered it in part by saying relief could be on the offering, but you are still taking a cautious approach. But I want to hone in on R&B specifically, or maybe the rest of Africa operations, because we have seen some challenges in other African markets as well. Mary, I mean, if you look at what is happening in Ghana and the devaluation story there of the CD, although there is improvements there, but inflation is still high. Nigeria, keeping a lot of CEOs and I'm sure a lot of your friends in the industry up at night because of the structural reforms that are a lot of pain right now, and people are still looking forward to when they'll see the gain. And even Zambia, they're going through the most at this present moment in time as a result of climate induced disasters. Just talk to us about some of the pressure points on the continent and the plans in the year ahead. So if I look at, if I start with R&B and their credit experience for this year. So what you'll see is strong advances growth from R&B. So I think a lot of that credit charge that's coming through it as a result of new business originations. There are certain names that have moved to our watch list, and I think it's SA corporates that would be well known to yourself, which has also lifted up that credit experience. And then certain, I think two or three names on the private equity side in the investing companies that we've also increased impairment. So by and large, I think that credit loss, the credit experience in R&B, I think is solid. So it's a significant increase because they were also really coming from a low base last year. And I think we see the same, I think resilient credit experience in commercial. And I think it's really largely a function of really being very targeted industry led and really where we land and which customers we choose to support, which have got prospects of making it. I think just in this cycle, I think that's really been our focus. And if I look at West Bank, I think West Bank has been very disciplined in its pricing and its risk selection over the last years, given how competitive that environment has been. So again, increase in impairments, but if you look at where the credit loss ratio is, I think that they've done very well to still be on the lower end of the credit experience. And similarly, that's the case in a broader Africa portfolio. I think we've been really quite fortunate, but I think I will say that we've been really quite deliberate, I think, in focusing in industries and I think backing corporates and backing large projects where we have better visibility around just the capacity and I guess the micro factors. So I think outside of retail, we're really quite comfortable about the credit performance and even just the outlook across the portfolio. The markets that you have indicated, yeah, I mean, I think in Nigeria, we've seen, you know, how high a price they have had to, that the population have had to stomach because of the necessary economic reforms. But they do come with a lot of pain when inflation is at that level. Our business in particular in Nigeria performed very well, I think up 76 percent on a constant currency basis. But of course, when you convert it to rent as an SA shareholder, yeah, I mean, that brings about pain. But I mean, we're quite positive that if I think that, you know, the government sees through the economic reforms as difficult as it is, respond with tightening monetary policy, that Nigeria will emerge on the other hand. So I guess this is where one has to take a long term approach. Obviously Ghana and Zambia saw debt restructuring, that maybe hopefully in the next year, they start being bedded down, inflation coming down a bit. Zambia, the drought, I think you've mentioned it, Fifi. So some of these, all these markets are challenged. But I think within our portfolio, I think all those experiences, you know, the portfolio is able to absorb some of the shocks that come with operating in the markets when these dislocations take place. And by and large, as I said, you know, I think it still helps that we are, we are a South African company. I know there's, you know, I think there's, one can now be constructive and look forward to when SA growth lifts. But I think even when things were still quite dire, you know, we still always thought that even when the economy is not giving us much, I think our franchises in South Africa know how to focus and hunt for growth. So, you know, SA is still really the, I think the market where we are looking for meaningful shifts from our franchises. And of course, we want our portfolios outside of South Africa to continue bringing the diversification benefit. Sure. Mary, excuse my ignorance, but I'm actually not aware of the one or two or more companies that contributed quite significantly to your uptick in impairment charges this time around. Are you able to name them? No, not at all. I think because of client confidentiality, we are unable to do that. But I think it would be, yeah, I think it would be, you know, names of companies, I suppose, sectors that are in distress. Okay. Okay. Not to put you on the spot there, absolutely understand the need to protect your customer. PaySharp. So, if we circle into the retail part of the business, you have been mentioning that quite a bit. But I want to talk about PaySharp, the hit that you took as a group to lower the fees for more people to transact in this, I think, this innovation from South African Reserve Bank that is trying to promote greater financial inclusion, as it were, and move more South Africans to a cashless society. So, just talk to us about the broader thinking there and whether the reduction in fees was to increase volumes or whether it was as a result of increased competition in the space from your peers who are doing the same. Yeah, thank you, Fifi. I mean, we welcome, you know, the South African Reserve Bank's leadership, I think, in ensuring that payment rails in South Africa over a long period of time are going to ensure that there is more financial inclusion. And I think we were active participants in the buildup of the payment rails for PaySharp. Now, when PaySharp came in, it was applicable to payments below R3,000. And I think the fee that we then determined, I mean, none of the banks were really quite sure how we were arriving at this amount, but we understood it had to be quite a small amount, I think, to encourage usage. And I guess also just reflective of the fact that, you know, I think at those levels of amounts, we do need to make sure that the rates are competitive. So, we looked at that, and I think it was R7 that we came up with at that level for the transactions that would go through PaySharp. And then, Fifi, what we then did is that we then reviewed how much we are charging on payments above R3,000, where PaySharp is not applicable, and across the stack and across our segments in retail and in commercial. And the business just took proactive steps to say, OK, but now that there's this technology and now that these rails and there's been investments in the platform to make sure that we can be quicker, I think more efficient, I mean, our processes over the years, are some of the prices that we are charging, I think, still reasonable. So, I think it's really more the proactive measures taken to reduce other EFT-related costs and payment-related costs from different rails that got us to reduce costs by a billion rand. And I guess, over the years, we've always done that. You know, we'd sit back and say, OK, but let's review when we charge these rates. You know, what technological capabilities did we have? You know, I mean, are we able to test for fraud and therefore clear the payments a lot quicker than we used to? And I think it's just those improvements over time, which, you know, we would ordinarily extract. And I think F&B has been very good and been proactive at reducing some of these costs that we know in the long run, you know, I think, have to come down. Yeah, and I think there is lots of innovation that's going to be coming our way, but I think we've always just been able to make sure we are front-footed and we respond. But yeah, largely welcome, I think, the initiatives to make sure that there is increased financial inclusion and I guess we play our part.
Theme: FirstRand's financial performance, UK probe impact, and business outlook
FirstRand, a leading financial services provider, recently reported a 4 percent increase in annual normalized earnings and doubled its annual dividend. However, this positive performance was overshadowed by a provision of R3 billion set aside to cover the potential impact of a UK investigation into vehicle loans and rising bad debts across its divisions. In a recent interview with CNBC Africa, Mary Vilakazi, CEO of FirstRand, shed light on the ongoing UK probe and the company's outlook. Vilakazi discussed the origins of the UK Financial Conduct Authority's review of motor finance commission practices and the potential implications for FirstRand. Despite facing challenges from claims management companies, Vilakazi emphasized the company's compliance with regulations and its commitment to customer welfare. She highlighted the complexity of the situation and expressed optimism that the review process would provide clarity in the second half of the financial year. Vilakazi also addressed the potential outcomes of an unfavorable finding and the sufficiency of the provision made by FirstRand. She emphasized the group's transparency and proactive approach to managing the situation. Looking beyond the UK probe, Vilakazi discussed the performance of FirstRand's UK operations, noting a 25 percent increase in normalized earnings. She expressed confidence in the market's potential growth and the supportive environment created by declining inflation and interest rates. Vilakazi highlighted the resilience and strong credit experience of FirstRand's businesses, particularly Aldermore and Motonova, in the UK market. Despite challenges in other African markets, including Ghana, Nigeria, and Zambia, Vilakazi underscored the company's deliberate focus on industry-specific opportunities and risk management. She acknowledged the macroeconomic challenges in these regions but expressed confidence in FirstRand's ability to navigate and absorb shocks. Transitioning to the retail segment, Vilakazi addressed the impact of the PaySharp initiative on the company's fee structure and broader financial inclusion efforts. She explained the rationale behind reducing fees for transactions below R3,000 and highlighted FirstRand's proactive cost-cutting measures to align with technological advancements and promote efficiency. Vilakazi emphasized the company's commitment to innovation and responsiveness to industry developments. Overall, Vilakazi's insights provided a comprehensive overview of FirstRand's performance, challenges, and strategies for sustained growth in a dynamic financial landscape.
"Mary Vilakazi underscored the company's deliberate focus on industry-specific opportunities and risk management, expressing confidence in FirstRand's ability to navigate and absorb shocks."
['FirstRand', 'Mary Vilakazi', 'UK probe', 'financial services', 'earnings', 'dividend', 'credit experience', 'business outlook', 'Africa', 'retail', 'innovation']