FirstRand takes Covid credit knock on the chin


FirstRand takes Covid credit knock on the chin

Published Date: 2020-09-11 | Source: Stephen Gunnion | Author: Stephen Gunnion

FirstRand takes Covid credit knock on the chin

The banking group says activity levels are expected to remain muted for now, but it is positioned for a recovery when things normalises.

FirstRand has reported a sharp fall in full-year earnings after making steep allowances for more bad debts due to Covid-19. However, it has taken the knock on the chin and says it is positioned for a recovery when conditions start to get back to normal - although that's only expected to be next year.

The banking group, which includes retail bank FNB, investment bank and fund manager RMB, vehicle and asset finance division WesBank, as well as UK businesses Aldermore and MotoNovo, said results for the year to end-June reflected the extremely difficult operating environment since the onset of Covid-19. It attributed the decline to much higher than expected credit impairment charges, which it has to book upfront due to accounting regulations. Although the pandemic only affected the final three months of the second half of the year, under International Financial Accounting Standards (IFRS), banks are required to consider forward looking information when they calculate the credit losses they expect to incur. FirstRand said its forward calculations resulted in a material increase in provisioning due to the customer stress caused by the pandemic and the resultant economic pressure that was anticipated over the next 12 to 18 months.

The impact of the credit performance was further compounded by margin pressure, subdued non-interest revenue growth due to lower absolute volumes during the lockdown period, and depressed new business origination. Debt relief was provided to 18% of its customer base, including retail customers in good standing at FNB and WestBank and payment holidays for commercial customers. Corporate relief was provided in the form of additional liquidity facilities and covenant waivers.

Excluding the credit provision, FNB held operating profit steady for the year at R32.3 billion while RMB grew pre-provisioning operating profit by 14% to R11.7 billion. WesBank reported a 7% decline to R4.25 billion and its UK businesses grew operating profit by 9% to R4.85 billion. Group pre-provision operating profit was 2% lower at R48.3 billion.

For the year, normalised and headline earnings sank 38% to R17.3 billion and its normalised return on equity (ROE), a key measure of its financial performance, declined to 12.9% from 22.8%. Basic earnings per share came in 44% lower at 303.5c while headline EPS were 38% lower and 308.9c. Its credit loss ratio more than doubled to 1.91% from 0.88% as it increased its total impairment charge by 132% to R24.4 billion. Despite ending the year with a strong capital position, it hasn't declared a final dividend due to the Reserve Bank's guidance for bank's to preserve capital.

FirstRand said while trends were improving as the economy recovered following the lockdown, it expected activity levels to remain muted, with subdued balance sheet growth and no material improvement to its credit performance.

The bank's shares rose 0.2% to R41.10 yesterday.

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