FirstRand does not share the government’s “enthusiasm for Russia”, and the friendship has raised “profound” geopolitical risk for the local banking sector, FirstRand CEO Steve Pullinger warned yesterday.
Speaking in an online presentation at the release of the financial services group’s results for six months to December 31, he labelled as “foolhardy in the extreme” the government’s “left-leaning friendship” with Russia and China”, in the light of Russia’s role in the war in Ukraine.
He said many of the countries “were vehemently opposed” to Russia’s role in the Ukraine war such as the US, UK and in Europe, who were historically South Africa’s biggest trading partners, far more so than Russia.
Also, the South African banking sector, including the SA Reserve Bank, was reliant on these countries for access to dollar-based global banking settlement-and-clearance systems.
This access “can be revoked with ease” and was a “privilege to have” not a right, he said.
He said South Africa was increasingly being called out by its major trading partners about the open friendship with Russia.
Denker Capital portfolio manager Kokkie Kooyman agreed. He said there was a “not impossible in today’s environment” risk of sanctions against South Africa, also through its financial system, particularly if there was an unexpected escalation in the Ukraine war that might force countries opposing Russia to polarise their international relations between those who were not friendly with Russia.
The US last month threatened China with sanctions, if it provided Russia with weapons to fight in the Ukraine war.
Fund manager at Nitrogen Fund Managers Rowan Williams said although the risk seemed low at present, it pointed “again to the failure of this government to understand the consequences of their actions to the business sector and broader economy”.
He said the banking sector was particularly alert to global risks at present following South Africa’s greylisting by the Financial Action Task Team (FAFT), because of insufficient checks in the financial system against money laundering and fraud.
Pullinger said the geopolitical risk from Russia was a risk far greater than the risks to the financial system of the greylisting by the FATF.
“The FAFT greylisting is unfortunate, but not unexpected and we believe it is manageable. The main headwinds are increased compliance and transaction costs, and perhaps lower capital flows to the country,” he said.
FirstRand lifted normalised interim earnings 15% to R18 billion in the six-months period due to new business gains in its large lending portfolios, growth in deposits and a strong showing in the transactional franchise.
The strong earnings growth resulted in a normalised return on equity (ROE) of 21.8%, which was at the top-end of their target range of 18% to 22%.
Approximately R6.2bn of economic profit was generated, the group’s key measure for shareholder value creation, which was now above pre-pandemic levels.
The credit performance was better than anticipated considering the higher interest rates, with almost all portfolios posting decreasing non-performing loans.
“These results reflect strong operational performances from our customer-facing businesses, FNB, WesBank, RMB and Aldermore, and demonstrate the size and quality of FirstRand’s transactional and deposit franchises, continued momentum in lending, and a better credit outcome than expected,” said Pullinger.
The strength of the customer-facing businesses in the FirstRand portfolio allowed the group to capitalise on profitable growth opportunities “across all markets, sectors and segments”, despite the challenging macroeconomic environment.
He said the group expected deposit growth to continue to outpace advances growth, the credit loss ratio was expected to continue to normalise, the operational run rate was expected to deliver underlying earnings’ growth in the second half in line with the first half, while normalised return on equity was expected to remain in the upper-end of the growth rate target of 18% to 22%.
“Notwithstanding these risks to the country, we remain confident of our strategies. Our customer propositions are well received, our financial resources are solid and our balance sheet is well struck,” Pullinger said.
BUSINESS REPORT