FirstRand's Prudent Lending Strategy Shields It from Credit Losses

FirstRand, South Africa’s largest bank by market value, has successfully sidestepped a surge in bad loans that has plagued some of its competitors by adopting a cautious lending approach in the wake of the Covid-19 pandemic. This strategic choice to prioritize prudence over rapid loan expansion has allowed FirstRand to navigate the challenging economic landscape with resilience.

In contrast to pursuing rapid loans growth, FirstRand carefully selected low- and medium-risk customers. As a result, its credit loss ratio, a critical metric measuring bad loans as a percentage of the total loan book, increased to 78 basis points over the 12 months to June, up from 56 basis points the previous year. Despite this uptick, it remained comfortably below FirstRand’s target range of 80-110 basis points.

In comparison, rival Standard Bank Group reported a credit loss ratio of 97 basis points in June, close to the upper end of its target range of 100 basis points. Nedbank Group, on the other hand, exceeded its upper target of 1%, recording a ratio of 1.21%, and Absa Group’s ratio stood at 1.27%.

FirstRand’s CEO, Alan Pullinger, explained this strategic approach, stating, “We knew coming out of Covid that households and businesses were not just going to bounce back to where they were in 2019.” Recognizing this, the bank decided to extend loans cautiously to both households and businesses.

While the credit loss ratio is expected to rise in the coming year, Pullinger remains confident that it will remain within the mid-range of the target. This increase is likely to be driven by ongoing strains on consumers and businesses due to a weak macroeconomic outlook, which is dampening the recovery.

FirstRand’s overall impairment charge saw a 55% increase, reaching R10.9 billion, primarily fueled by challenges in its South African retail segment and a surge in bad loans within its UK business. Pullinger shed light on the situation in the UK, saying, “It’s a very tough environment at the moment in the UK with consumers having to face that cost of living combination of high interest rates, higher inflation, higher energy prices. These things are really weighing on households in the UK.”

However, Pullinger noted that approximately 70% of lending in the UK pertains to real estate, and the persistent property shortage in the country is expected to provide some cushioning effect on property values.

Despite these challenges, FirstRand’s franchises in other African countries have delivered remarkable growth in pretax profit, posting a 32% increase. Even in the face of debt restructuring in Ghana, high interest rates, and inflation, the bank’s African operations continue to expand.

Looking ahead, Pullinger stated, “Over the next year, it is still going to be tough, but longer term, we are constructively positive on our broader Africa portfolio.”

Although FirstRand’s shares initially dropped by as much as 4.5%, they later recovered to a 4% loss by 3:28 p.m. in Johannesburg. This demonstrates the market’s recognition of FirstRand’s prudent strategy in safeguarding against credit losses during these uncertain times.