FirstRand remains resilient in recession

Special dividend surprises

09 September 2019 | Sakenuus
Jo-Maré Duddy – FirstRand Namibia ended its latest financial year with a profit of nearly N$1.09 billion – N$25 million more than 2018, but lower than 2017 as well as 2016, the last year the country was recession free.

Profit reported for the year ended 30 June 2019 was nearly 2.4% higher than the previous book-year.

“The group continues to operate in an uncertain and challenging operating environment,” the chief executive officer of FirstRand Namibia, Sarel van Zyl, said in the group’s latest annual integrated report.

“FirstRand Namibia believes that some of these pressures are structural rather than cyclical in nature and will prevail for some time,” he added.

Commenting on FirstRand Namibia’s results, PSG Namibia said the group’s net profit for the year came in lower than the growth of 4.4% they expected.

“All in all, the results seemed to be more or less in line with our expectations, with headline and basic earnings both increasing by 3.0 year-on-year,” IJG Securities said.

“ … the results were far from shooting the lights out, however there are clear signs of resilience despite the challenging environment,” IJG said.

Advances

FirstRand Namibia’s total loan book grew by nearly N$1.8 billion or 6.2% to N$30.3 billion. IJG pointed out that this is below overall private sector credit extension (PSCE) of 7.4% year-on-year over the same period.

“This means that N$2.541 billion, more than half of the increase in deposits, found its way into investment securities made up mainly of government bonds and treasury bills,” IJG said.

“Total investment securities now total N$7.807 billion and make up 17.7% of the balance sheet. This is one of the few cases where having too much money is a bad thing, as the returns on risk-free securities are lower than the prime linked rates charged on traditional lending and the idle cash lowers returns on equity,” the analysts said.

The chief financial officer of FirstRand Namibia, Oscar Capelao, in the annual integrated report said the “gap between our advances growth and that of PSCE is influenced by the significantly slower growth of individual credit demand”.

Mortgage loans increased year-on-year by 3.3% to N$13.5 billion and constitute 44% of gross advances. In 2018, the figure was 46%.

“Our exposure to home loans is reflective of the Namibian banking industry where home loans tend to average 40% of credit extended in the local market. As a result, the growth rate of mortgage loans dragged the overall growth of the advances portfolio. In line with our risk appetite, we have selectively grown the home loans book in segments where we believe the risk is lower,” Capelao said.

Non-performing loans

FirstRand Namibia total impairment charge increased year-on-year to N$214.8 million, up N$86.5 million or 67.4% from 2018. The charge represents 0.72% of gross advances compared to 0.45% in the previous book-year.

“Group credit loss rates increased as expected, impacted by a more challenging macroeconomic environment and the implementation of IFRS 9,” Capelao said.

“The portfolio impairment charge increased from N$2.5 million to N$85.6 million and is in-line with the group’s strategy of maintaining an appropriate level of provisioning on the performing book,” he said.

IJG said “increasing impairments has been an industry wide trend and is symptomatic of the current economic environment”.

FirstRand Namibia’s ratio of non-performing loans (NPLs) to gross advances ended the period under review at 2.7%, compared to 1.9% in 2018. In dollar terms, NPLs increased from N$549 million to N$845 million, Capelao said.

“Security held against NPLs stands at N$556 million, demonstrating our commitment to responsible lending,” he added.

Special dividend

FirstRand Namibia announced a special dividend of 250 cents per share. This was unexpected, IJG said.

“Seeing as the bank increased their holdings of short-term liquid securities, the total risk-based capital adequacy ratio of the group improved from 19.1% to 19.9%. With this in mind, the special dividend makes a lot of sense,” IJG said.

“Seeing as the bank cannot find enough lending opportunities in the current market, while deposits continue to grow, it is best to return cash to investors rather than diluting the return on equity by being overcollateralised. Arguably, a share buyback would be a viable alternative to achieve the same goal,” the analysts continued.

“Although much depends on the macroeconomic circumstances going forward, the company remains well positioned should Namibia return to growth and private sector credit growth pick up over the next couple of years,” IJG said.

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