FirstRand earnings sink as customers seek debt relief

FirstRand has posted a significant drop in headline earnings for the year ended June 2020, reflecting an extremely challenging trading environment brought on by the Covid-19 pandemic and subsequent lockdown.

Headline earnings declined 38% to R17.3 billion, from R27.9 billion previously. Basic headline earnings per share reflected the same decrease to 308.9 cents, from 497.2 cents prior.

Net interest income was up marginally at 4% to R62.9 billion. Return on equity (ROE) declined to 12.9%, mostly due to the much higher than expected credit impairment charge – up 132% – driven by forward-looking economic assumptions, it said.

“In addition, post the beginning of lockdown in March 2020, underlying customer income and affordability in all segments deteriorated sharply, as evidenced by lower levels of underlying transactional and credit turnover, and in the amount of debt relief requested by customers, resulting in increased arrears and non-performing loans,” the financial group said.

Profit for the year was 36% lower than in 2019, at R19 billion. Despite the group’s healthy capital position, the board did not declare a final dividend.

Declines were recorded across all the group’s segments, including a 31% drop in normalised earnings at its retail segment, FNB, to R12.3 billion.

Rand Merchant Bank’s earnings took a 58% hit, with vehicle finance group WesBank falling 53%.

Covid impact

“The Covid-19 pandemic is a once in a generation event and has had a profound impact on the world. In South Africa it resulted in the deepest GDP contraction since the Second World War. The lockdown devastated the economy and it will be a long hard road back to recovery,” said chief executive officer, Allan Pullinger.

The group noted a sharp increase in the number of customers applying for debt relief as a result of the Covid-19 pandemic, recording 306,700 individuals with 792,000 accounts signing on – 18% of its portfolio.

This equated to R229.6 million in relief being offered across the group.

Retail customers were the most affected, making up 674,300 of these accounts.

FNB provided relief to commercial customers primarily in the form of payment holidays and additional relief was offered to SMEs through the government-guaranteed loan scheme.

For corporate, relief was advanced on a case-by-case basis. Corporate relief was provided in the form of additional liquidity facilities, payment holidays and covenant waivers.

Prospects

Economic activity in South Africa is expected to start to rebound from the depths of the first half of 2020. This is mainly linked to the easing of lockdown measures and could stem the level of job losses and support the start of a recovery, FirstRand said.

“However, given the South African government’s limited capacity to inject further stimulus into the economy, there will be ongoing permanent damage to household and business balance sheets.

“This will limit the extent to which the economy will be able to recoup the output losses sustained during the first half of the year. As a result, private sector credit growth will remain weak and activity levels will continue to trend lower than pre-crisis,” it said.

The group said that the economic impact of Covid-19 will continue to place acute pressure on the group’s performance for the rest of the 2020 calendar year.

“Trends post lockdown are improving as the economic recovery slowly emerges, however, activity levels will remain muted on a relative basis, balance sheet growth will be subdued, and the credit performance will not materially improve.”

FirstRand anticipates an upward trajectory in earnings in the second half six months to June 2021, although the absolute level of earnings on a year-on-year basis is unlikely to revert back to June 2020 levels, it said.

Read: FNB offers coronavirus payment relief extensions to select customers