Good afternoon, everybody. Welcome to the FirstRand Pre-Close Call. With me today is Alan Pullinger, CEO, Harry Kellan, CFO, Mary Vilakazi, COO. We have a few opening remarks and a couple of slides to go through, and then we will go to Q&A. Apparently, you need to click the button top left to ask a question, but I'll remind everybody after the introductory remarks. Over to Alan Pullinger.
Good. Thank you, Sam, and welcome to everybody on the call. Upfront, let me address the earnings guidance that we recently gave to the market. The growth in earnings guidance for the year to June 2024, as indicated in September, remains intact. To reiterate what we said, we expected earnings growth to comprise real GDP, plus CPI, plus an add-on in the range of 0%-3%. What we did say is that in the current year, we expect the add-on in the range would be closer to the 0%. In other words, overall coming in closer to nominal GDP. Return on equity guidance for the year also remains intact. Moving then to the income statement.
All key income statement line items are largely tracking in line with our expectations for the full year, except for credit, which we think will look better for the full 12 months. We had guided by June 2024 that we would be hugging the midpoint of our through-the-cycle range. Just to remind everybody, that would be around 95 basis points. However, we now feel that the print may well come in lower. We believe this demonstrates the origination strategy the group followed, and this continues to play out in stronger relative credit performance despite the challenging cycle. The credit loss ratio has been supported by improved forward-looking macro assumptions and then softer advances growth. Overall, the customer franchises are in good health and remain resilient.
In FNB, the non-interest revenue run rate is a touch softer, given the ongoing consumer pressure in the retail segments, coupled with the fee givebacks implemented by FNB. However, the volumetric data continues to show growth in both volumes and customer numbers. Trends in retail, secured and unsecured advances have also softened since June, mainly due to our continued focus on quality risk, as well as a reduction in overall customer demand. In the commercial segment, growth in customers, advances, and deposits continues to show good traction. RMB's advances continue to grow well within expectations, albeit at a slower rate, given the base of the previous period. RMB's cross-border book continues to grow and perform well in the current period. So the overall deposit and advances activities are supportive of NII growth for the current year.
We expect overall margin to be flat, given the mix of origination and the endowment investment strategy. Moving to the U.K., the Aldermore business is also performing in line with expectations, even though advances growth has been impacted by appetite pullback given the cycle. Credit is also performing better than previously guided. So as we stand today, the overall business is tracking, which, as we expected, and which in this environment, we think is a very pleasing outcome. I do want to mention a few data points that suggest we will have two different halves to the current financial year. You will recall in the first half of last year, we reported a large private equity realisation that we will certainly not repeat in size in this first half.
Although the absolute benefit of the private equity realization last year was offset by the Ghanaian sovereign debt restructure impairment, it still represented about ZAR 300 million of net earnings benefit in the comparative six months to December 2022. To recall, the NIR for last year's disposal of Studio 88 was ZAR 1.2 billion, with a resultant ZAR 800 million of net earnings. Second point we would call out is Aldermore's performance is negatively impacted by the fair value movements of the interest rate hedge. We previously flagged that in the prior period, the business recorded fair value hedge income, and with the yield curve in the U.K. normalizing and changes in the book's amortization profiles, we expect a reversal of this income.
Then the final point that we would like to highlight is that growth in costs in the first six months of this year will be higher than guided for the full year. We continue to have high expectations that this will normalize into the high single-digit cost growth number we had guided for the full year. With those opening comments, we are very happy to take any questions. Thanks very much.
Thanks, Alan. Just to remind everybody, if you want to post a question on the webcast, please click the button top left, and then, I'll read the question out to the room. I have a question from Kevin Harding at Investec Wealth and Investment: Which forward-looking macro assumptions improved relative to your initial assumptions in September?
Do you wanna take that?
So, yeah. So the first one was relatively we were seeing is, in essence, we had marginal improvement in real GDP. Marginal, but an improvement to where we were sitting across in, let's say, May macros, but we're looking at in June. The second one was effectively, inflation. Inflation, we were expecting it to go marginally up above. We think inflation will be longer, but actually still being marginally lower than what we think it would peak at, and both you'll see that similar kind of situation sitting in the, in the U.K. So there's largely real GDP inflation and, and rates. Rates are similar. Actually, when we were talking in September rates, we were saying it is, it is near the peak, especially on the South African side, near peak rates.
If there was going to increase, the increase was going to be about 25 pips or maybe 50 bps on the top end, that those assumptions are still in place. So it's largely effective inflation and GDP growth.
Thanks, Sam.
Next, a question from Keonon Konoki from Citi: Please, can you unpack which product segments have performed better than expected, and what drove costs higher than initial expectations?
Product sets, I presume that question relates to credit loss ratio on product sets, or Sam, did it say specifically?
Product segments. So perhaps you could cover both, Harry, product and segment.
Okay. So let's just start with segments. So if you look at retail as a segment in terms of where we're sitting with expectations versus the reality. So when we were guiding around where we think the flow of stage one into stage two and then ultimately NPLs, and how that flow goes across, given this environment change, and that's why I say some of the benefit of the macros is flows benefiting to where you see the roll rates. You can see on retail, it's actually net printing better, so it's, it's that piece, together with the softening of advances, so you don't have stage one coming into it. So the growth rate of advances actually has softened, as you'd expect, even in around some of the strain sitting in the consumer market and retail in particular.
But that also plays into the credit impairment. So you'd see advances growth softer, benefiting impairments, and similarly, as you said, effectively, the macro changing benefit impairments. And the net roll, that growth from stage two to three in particular, yes, it's increased, but the increase is marginally lower than what we'd expected when we were guiding it in September. So you have all the, all those combinations playing around in terms of retail. Commercial, to be fair, actually, the growth rate and the run rate on commercial advances is very similar to what you've seen reporting in June. So that actually is not softer. So commercial continues. And the impairment aspect actually is not too dissimilar to what the roll we've seen at the results being presented at June.
On the corporate side, actually, corporate, we did guide to say the last financial year, we had a very good build-up on corporate advances. We did say, actually, we'll never get to the similar level of growth, but actually the pipeline has been fair from September to where the results are sitting at right now. So there's been fair growth in terms of corporate advances. Yes, there'll always be the play around in terms of margins, so it is better quality advances or rather the more tighter of the investment grade advances growth. So that has the impact on the margins of the business and the corporate base. So that covers a little bit of the product sets as well as impairment. Then on cost. So the cost is more...
When Alan was guiding early on, he's effectively saying, "Let's look at what we guided on cost." That we guided on cost to be towards the high single digits for the full financial year to the June. And we anchored that around effectively salary increases was, let's just say, 6.25-ish kind of approach to that. Yes, it included inflation, yes, it included currency exchange rates, but that was for the full year. What you have in the first half of this financial year, and if you go back a little bit, last year, in the first quarter of H1, i.e., let's just say from July to September, you had headcount increases that effectively come in on, say, for an averaging period of, say, 3 months. That averaging flows into full 6 months now.
So the headcount impact of last year's growth is what plays into now. Yes, last year also had the last of the remaining three months of non-vested share of LTIs. So all of those impacts effectively, hence Alan's comment around the tail around two halves, in particular for cost. So the full year guidance on cost is still intact at high single digits. Clearly, you'll have pressure because of normalization, in the H1 that you'll see on the cost side on the pressure.
I have a question from Charles Russell, SBG Securities. Your guidance on normalized earnings is unchanged for full year 2024, but you have adjusted your credit expectations better. What is the equal and opposite offset?
So similar doesn't mean it's equal, but you're right in terms of directionality. So if you got softer advances growth, clearly you'll have softer revenue growth coming off NII. Then the comment that Al made in terms of NIR, you can see in terms of, especially on the SA side, consumer pressure around, around, of transactional volumes. Good transactions volume, but it's still softer on pressure, so you already have some softening on NIR. We talked about the fair value hedge reversing in the period. So last year, I think for the first six months, but in fact, I have better memory on the full year. Full year, we had almost fair value hedge income, somewhere around GBP 25. And now you've seen that we've actually some of the reversal.
What that implies is that actually you're taking a debit, so that has its swing year-on-year in terms of NIR. So there is correct compensating around NRR, NII, and for December in particular, will be the cost impact, but the full year cost is largely intact. So it's more revenue relative to the bad debts.
Yeah. I think top, top line is the offset, and, and then the call out is that fair value hedge, delta.
Mark du Toit from Oyster Catcher Investments: Is the better credit expectation mainly due to lower origination strain or better credit outcomes?
Sure. So I think without a doubt, it's unfortunately a combination of both. So if you have softer advances growth, i.e., lower advances growth, you're gonna have lower origination strain as it goes. But without a doubt, that alone itself cannot explain the full impact. The impact is also better collection still, actually, and then as outcome, better outcome on credit. The strategy around when we talked about the strategy of low- to medium-risk growth across the business, that is definitely still continuing to play out, even though on a relative basis, the environment is still quite tough. So it is actually a combination of both.
Yeah.
Question from James Starke
Mm-hmm.
RMB Morgan Stanley. Please, can you give an update on your latest thinking around inorganic growth in the UK and Africa regions?
Yeah, thanks, James, for that. We are, I guess we're gonna reiterate what we said previously. I suppose if something passes by, it looks strategically interesting for us, it we would certainly apply our minds to it. Are we actively hunting at the moment? You know, anything in the U.K. or anything in broader Africa or one of the regions? The answer is no. We have said for some time now that we continue to look at East Africa as an area where we would like to increase our presence. There's no change to that stance. We as yet have not found a sensible entry strategy there, but we'll continue to look and be patient. In the U.K., of course, Co-op came to the market.
It was brought to us as one of the groups or a group of sort of specialist bank, challenger banks. We did what I think our shareholders would expect us to do. We had a good look. We did not progress, I guess, beyond the prelim stages on that particular opportunity. We don't have to go into the details why it didn't work for us, but we decided this is not. It was not for us, and so we withdrew quite early on in that process. I think that particular opportunity is continuing, I think with some other interested players. But again, you know, with respect to our business in the U.K., we have a good organic growth story.
We have a lot of work anyway, keeping us busy, looking after customers, re-platforming our business in the U.K. And so, you know, our hands are pretty full at the moment. That doesn't give us a lot of time to go and look around the U.K. for interesting things to buy, but if something gets brought to us, we'll have a look. So there's no real change there, and I can't see that position changing in the current year.
Yeah, just, just to add, Al. So, I mean, in terms of... Let's just pick up on the U.K. We've always said strategically, what are the strategic ticks that will be met by the business? Either it comes across with technology, spend that effectively leapfrogs what Aldermore's investment profile is. Does it come with product sets, or does it come with unique, capacity of individuals? All of those three things. So it will be what filtered through of what they look at opportunity is still the same filter, and clearly, then it also must then make return and financial sense before anything else. So none of that changes from what we've previously discussed, and that is the same thing in terms of, of some of the presence in, in broader Africa. But, Mary, I don't know, maybe you want to add?
No, I mean, I think there's quite a fair amount of activity, it would seem. But I think as Alan has said, there's no change in our approach. I think at this point in time, we can't say there's anything that we are actively pursuing. But yeah, we will have a look when the... when, when something that looks like it would either expand our, our footprint or I think help us scale our existing subsidiaries, further.
I've got some questions from Ross at Investec. I think we've answered the first one, which was: What were the key qualities you'd look for in terms of a U.K. acquisition? I think we've answered that. What are the main drivers of the better-than-expected credit guidance at Aldermore and across the group? I think we've dealt across the group, but perhaps we haven't dealt with Aldermore.
So Aldermore actually is far more bigger in terms of book growth. So in the older environment, in the macros, actually, we made a comment to say, "Pull back in terms of appetite." That pullback then says, you know, if, I mean, if their book is flattish by the time we come to market in February, I think they've done a very good job on overall. There's pockets of growth in some businesses and some product lines, but I'm talking about overall piece. In which case, if it's flattish, then definitely don't have Stage one, and that run-off profile comes in around that. And the macros, now I'm trying to see from memory, and the team might correct me, is that it hasn't been a material change in the macros from June to now.
I think it's marginally better, especially in terms of expectation of rates, and the pace of which rate hikes coming into the U.K. environment. So that definitely helps on credit, but it's effectively the size of the book and lack of growth coming in from that, where the origination strain is not there.
Yeah. I mean, again, there are no trends in those U.K. books which are outside expectations or indicate any cause for worry. So, it's all tracking, I think, in line with expectations. And, I suppose the other point area that I would call out around macros is the. It does look like inflation is now starting to kind of come down in the U.K., so we've seen quite a big reprint lower. So, let's see if that is sustained.
Question, basically, any developments in broader Africa worth mentioning, especially Ghana? So I don't think we specifically covered Ghana.
No, we haven't. So since September, I guess the... I think they finished the restructuring of the Eurobond, but we had already provided for that, in June, so no further additional provisions related to the Ghana sovereign. Our business, they're doing the best that they can in a high inflation environment. I think, muted growth, but they continue to grow that customer customer franchise, so we're not concerned about our business in particular. There's some accounting story that's going to come through on account of... 'Cause I think Ghana's now been designated as having hyperinflation. But I guess our operations are not-- our business is not that big. It's not a, I think it's not a material issue for group, but I suppose a material issue for that in-country business.
But, yeah, nothing, no big adjustments coming through for Ghana-related business, into the group. Nothing we can't handle.
Yeah. Sam, just on the, on the Aldermore Credit piece, is that the statement I made early on in terms of where we expected rates to peak versus where effectively it's peaking at a maybe a later point in time, that does benefit the FLI. So the statement I made early on in terms of FLI, that also plays into, into Aldermore's positioning, so that also then plays into a better credit outcome because of the FLI.
Thanks, Harry. So before I move on to the next two questions, just to remind everybody, if you want to ask a question, please click button top left of the screen. Okay, question from Stephan Potgieter from UBS. Alan, I think you've answered it, but I'll ask it again: Given the better credit quality performance, do you therefore expect better than GDP plus inflation plus 0%, i.e., more in the range of 0%-3%?
Well, yeah, we're gonna do our best. I mean, I think what we indicated, I mean, when we spoke at the year-end results, we spoke about this add-on range of 0%-3%. Of course, that's not a limit. We'd like to do the best we can. But we spoke about it in terms of sort of a three-year outlook. We just said in year one, we think we're at the lower end of that range. So I don't wanna say it's zero. I'm hoping we can do a little bit better than the zero. And then we felt we were much more constructive around sort of year two and year three, the outer two years being much more towards the top end of the range, hopefully even better than that.
So, that's really where we are. I suppose we're a lot is gonna depend on how good our sort of November and December is. We're hoping for a good story here in South Africa, so we're gonna be pushing hard on that. Let's see what we can do. But I think for now, let's stick with towards the lower end of that range.
Thanks, Alan. Question from Harry Botha: How should we think about FirstRand's SA retail advances growth progressing into 2024?
So, Harry, if you look at what the product set's growth was for home loans, personal loans, credit card, commercial or retail, so those three in particular, vehicle asset financing and WesBank, whatever your run rate, and I think the easiest would be if you take your six months, six-monthly roll rate. So the six months net advances growth that you're seeing from January to June, you will undoubtedly see to December, a slowdown in absolute number of the balance sheet growth, and therefore, you could probably roll that to the full financial year at December. So the slowdown actually plays out in terms of the net balance sheet roll impact or the net increase in balance sheet growth. We are saying there is growth, though.
We're just saying it is softer growth than what you would have seen the result for the six months to June.
Yeah, I think that's fair. I mean, if you wanted a bit more color on it, I mean, I think it's certainly above mid-single digits. We are seeing a slowdown, a more pronounced slowdown, I think, in mortgages, secured finance. I think we've all started to see a slowdown in vehicle finance, so auto. We're seeing strong demand for unsecured lending. So applications for unsecured are very robust, but at the same time, I think, approval rates are also quite low. So those two things really offset each other, which I think just gives you a sense of where the consumer is, and the need to access financing.
So I think just to Harry's point, it's probably that softening, which you would expect, I think, in the cycle, I think that's probably gonna wash through to June 2024.
Another question from Charles Russell. In the U.K., there are approximately 2.4 million mortgages that will reset to a substantially higher rate by the end of 2024. How comfortable are you with Aldermore's credit quality on a forward-looking basis?
Comfortable. So when Alan made the comment earlier on in terms of the trigger points coming in across, in terms of the book, in terms of all the roles and that, actually nothing. So yes, there are mortgages that will reset to variable rate, and yes, at a higher rate, but there is always a time lag. So we're still comfortable from what the data sets we're going across. We're still saying that there is expected strain to come in as a timeframe of those because they're variable rate and not repricing at a higher fixed rate, and there's still clear expectations.
But the benefit you see in the credit impairment charge now is that the level of conservatism that the business had thought about how this thing flows into the impact into this financial year, actually, the data set isn't showing that that's level of strain. There's still an expectation, but we don't think the net growth of that strain is as stark as it was when we saw it six months ago. To consumers, in terms of the repayment profile and businesses, in terms of the buy-to-let repayment profile, actually holding up better than we marginally expected.
And, Harry, I mean, I stand to be corrected, but I can't be far wrong. I think probably 60%, maybe up to, let's say, two-thirds of those mortgages have in Aldermore reset already. So we're well, I think, into that journey. So we've had some experience now that we've been looking at those customers to see for any signs of stress. I think the two big offsets in the U.K., one, I think with inflation starting to come down, I think that's gonna start helping. The other thing that's been strong in the U.K. is a real growth in wages. So we haven't really seen much of a slowdown there. That labor market has remained very tight.
It's early signs, I think, of a little bit of weakness into that labor market, but it's still... I think you would still classify it as a very tight labor market, and I think wages have been supportive. So I think that's probably helping the story, to a large extent.
Around about two-thirds have actually repriced, and with the wages holding up as well, we also saw rental income actually... inflation and rental income has been robust, i.e., landlords actually have been repricing rental upwards and been getting it.
Okay.
Before I go to the next question, just to remind anybody who joined us late, if you want to ask a question, please click the bottom button at the top left of the screen. James Stark: Please, can you comment on trends you are seeing in your deposit funding markets, both in SA and the U.K.?
So on a deposit side, in the U.K., actually, the UK deposit market, remember, Aldermore is effectively a rate card-driven deposit franchise, i.e., they'll always be, let's just say, always on the first page of funding profile. They've been able to bring in enough deposits and both on the business side as well as on the retail side to fund growth. Clearly, with lower and softer advances growth, they will not then raise deposits into the market as much to the same extent. So I think on that deposit franchise, still fairly resilient and continues to be able to fund the business. On the SA side, actually, we've seen continued good growth in customer acquisition that supports deposit growth, both in terms of the retail and commercial side. We're still seeing probably better growth on the commercial side of deposits.
I think with consumers under strain in SA, you do see them eating away at their deposit balances. So the growth is largely customer growth, inflation, and marginally lower than inflation as customers effectively eat away at the deposit that they've actually got to be able to fund their consumption or utilization of cash.
Next question from Matrix Fund Managers. What would give you confidence in SA retail to grow advances much more, much more above mid, mid-single digits? The low credit approval rate, where is that percentage now versus historical standards?
Well, to be honest, low approval rates versus historical standards-
On unsecured
... On unsecured, it is largely the affordability ratings that come off. So it will... Relative to the historical, I'll have to check, but I think it's directionally it makes sense, given high inflation against historical. Without a doubt, high inflation. If you look at, actually, yes, salary increases have been in there, but effectively, the strain in the environment, macro assumption takes a lot out of affordability. And it's not only just inflation, you've got utility costs, you've got fuel costs, you've got et cetera, playing into that. So yes, I think against history, lower, I can't give you the relative lowness, around it. I don't know, Al, I mean, I'm-
No, no, no, no. I do think, I do think on a sort of SA Inc. perspective, this is not necessarily FirstRand data, but I do think applications for unsecured lending across bank and non-bank in South Africa, I think are at very high levels at the moment. So, you know, are they absolute historicals? I don't know, but they're certainly up there. And then rejection rates are also also very high. You know, and again, you know, are those at historicals? I'm not sure, but they are certainly very, very elevated at the moment. I do think, I do think, you know, typically where we are on unsecured...
And remember, I mean, let's just talk for the moment on unsecured, because that is, I guess, a channel that we can activate quickly into our own customer base. And as I've said, the demand is there. I suppose one of the benefits we've got in unsecured is perhaps we've reached peak rates. So just in terms of the pressure to build in affordability buffers on interest rates, I guess that pressure subsides, I guess, to some extent. So we certainly know that we're not climbing further. The issue then is, you know, when do we see rate cuts coming in? We don't see any rate cuts in the financial year to June 2024, so we do think they happen in the second half.
And then although inflation certainly looks like it's coming down, I think it's still got some way to go here. The other point just around unsecured lending, and I guess in retail lending in particular, you know, the months of January and sort of February are pretty tough months from a collections perspective. So there's a typical cycle that we face going into Q1 of calendar 2024. It's no different to any other cycle. It may well be more pronounced, given high policy rates and where consumers are. So I think until we get over that period, and we get...
I get a better read on kind of, you know, where interest rates are going, where inflation's going, we can really start getting kind of a better read on affordability, then I think we can kind of move onto the front foot on unsecured. Just in terms of secured lending, I mean, you know, mortgages are typically, you know, we respond to demand, as opposed to being a channel we just activate. And again, there has been a pullback, as you would imagine, because it's such an interest rate sensitive asset class. So we would expect, You know, I can't see that we're gonna have a robust 2024 around mortgages in South Africa. Vehicle finance, interestingly for us, has held up actually well.
So it's been one of the books that has grown certainly the fastest for us. I think it's pleasing for us because it's you know that WesBank which was probably you know showing probably below growth that you would have expected from that franchise. We've seen really good growth come through from the WesBank business. And we expect a pretty decent advances growth story for the rest of the year. Although there are dynamics that are obviously playing out in the vehicle market. You know consumers are buying down. We're seeing sort of different brands come to the fore in terms of affordability. We're seeing some terming out of the financing.
I think there's an increasing evidence of kind of, you know, back-ended installments or balloon finance happening. But the WesBank has done, I think pretty much the... Of all the books, probably the one that has done better than we expected.
I don't have any more questions on the webcast, so last chance. If you want to ask a question, please click the button on the top left of your screen. Otherwise, I'm going to... I'll just refresh one more time. So there's nothing, so I'll hand back to Alan to give any closing remarks.
Good. All right. Thank you, Sam, and thank you to everybody listening on the call. Thank you to my colleagues. I hope you all have a good festive season, a good rest over December. If you see any of the Black Friday good shopping opportunities to swipe your credit card, yeah, please do it. We need all the growth that we can get, and we'll be ready to serve you as a bank. So thank you very much for listening, and we'll talk next year.