FirstRand benefits from welfare states

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FirstRand benefits from welfare states

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Published Date: 2021-06-08 | Source: INCE|Community | Author: The Finance Ghost

FirstRand benefits from welfare states

It's always enjoyable reading a SENS announcement that points to better prospects for our country and our economy. The FirstRand voluntary update yesterday morning was one such announcement.

In March, FirstRand gave cautious guidance that the earnings achieved in the six months to December 2020 would likely not be repeated in the first six months of 2021. The concern was around the impact of lockdowns in December and January as well as the third wave in the UK and its impact on non-performing loans.

In South Africa, the economy is doing better than FirstRand expected. The number of "to let" signs in the Cape Town CBD would suggest otherwise, but FirstRand operates at a macro level. The unemployment rate also suggests otherwise, which indicates the extent to which South Africa is a welfare state.

Nevertheless, impairments (i.e. write-downs of the asset book due to expectations of credit losses) are lower than predicted and the non-performing loan trend has been lower than FirstRand thought it would be.

This has been the case in the UK as well, supported by the government furlough scheme. Again, welfare states are keeping banks in the green.

FirstRand flags that net interest income (NII) for the six months to June is expected to be in line with the second half of calendar year 2020 "despite the significant endowment impact". This is a reference to low interest rates, although the rate has been the same since July 2020 so I'm not overly surprised that NII is consistent.

Equally unsurprisingly, non-interest revenue (NIR) is under pressure. Trading revenues are down in less volatile markets and fee revenue is suffering under lower volumes. Interestingly, insurance revenue has been impacted by higher claim levels.

Earnings are expected to be more than 35% higher in the year ended June 2021 than in the comparable period. There's clearly a normalisation of banking profits coming through the system.





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