FIFI PETERS: FirstRand has rewarded its shareholders for showing patience during some of the worst times of the Covid-19 pandemic, when banks stopped paying dividends to preserve as much cash as possible in case the worst-case scenario didn’t happen.

Now FirstRand, whose businesses include Rand Merchant Bank as well as FNB and vehicle finance company WesBank, has paid out dividends to its shareholders totaling R26.2 billion. This is the highest level of payouts in history.

We have the CEO, Alan Pullinger, on Market Update to find out more about the results. Alan, thank you very much for your time. So you’ve made up for not paying a dividend at that time – and then some – and you’re essentially saying this is the highest dividend paid since the group was formed in 1998. Or so?

ALAN PULLINGER: Hi Fifi and good evening to your listeners. Yes, that’s for sure. We are very pleased that we have been able to increase the annual dividend and then the special dividend on top of that. So, really, when you look at it, I guess it’s easy to think — I mean, how is that possible given what’s going on in the economy, where does that come from? But really, this is a story of massive stockpiling during Covid. Of course, you should leave aside these provisions, because it was expected that we could lose a lot of money on the portfolios. Of course, it turned out better than we did [had] thought

And then during Covid itself, we lowered the level of payout that we had for our dividend. And you will remember that the banks, by directive of the central bank, actually went through a dividend cycle where no dividends were declared because we wanted to preserve capital in the banking system.

I think things have worked out better than we thought, and luckily we’re in a situation where we’re building a lot of capital. Yes, we lend, but we certainly have accumulated much more capital than what we need to support that lending. And so we are delighted to be able to return it to shareholders. So yeah, that’s the bottom line.

FIFI PETERS: Yes, you have accumulated capital. What does this indicate? Why is the pile of money increasing at this stage?

ALAN PULLINGER: I think if you look at our profitability profile (so we’re making a 20% return on equity) and if you look at that and the profit growth we’ve had (so our profits are up 23%), clearly , that you create capital every year. Now we’re taking a lot of that capital and using that capital to support new lending. But the demand for capital, which is a kind of credit history, is insufficient to absorb the capital entirely.

Of course, our preferred option is always to use equity for growth because it implies higher returns in the future. So it’s really a wish. But I guess if you have an economy that’s growing at 1.7%, 1.8%, unfortunately, the growth is not enough to support that capital. So instead of sitting on it, which of course would be the alternative – we could sit and wait for that growth to happen, the implication of that is, of course, where do we put it? We would invest them in some government securities. Instead of doing that, of course, when we give it back to shareholders, you get this dividend multiplier effect because those dividends are then spent or reinvested, and you get that cash flow.

So I think it’s very good. It is good practice to return money to shareholders. It is not good for banks to sit on excess capital that they cannot deploy.

FIFI PETERS: is correct. However, I’d like to understand what you’re saying about consumer and business behavior when it comes to money, because you’re basically saying that it doesn’t run out and knock on your door hard, looking for loans to support all kinds of things . So how would you describe the financial behavior of let’s start with an FNB customer right now? And has it changed significantly since the beginning of the pandemic?

ALAN PULLINGER: Fifi, that’s a good question. When it comes to FNB – let’s leave commerce behind because commerce is small business lending. It’s actually growing a lot, and it’s really grown through the pandemic. So our commercial lending is, I would use the word active, and we expect that to continue.

When it comes to retail customers, we’ve seen some changes. First, we noticed a strong preference for secured lending as opposed to unsecured lending. So when we talk about secured lending, we’re going to talk about things like mortgages, and we’re going to talk about vehicle financing. Both got up. And if you look at our mortgage production, are you getting money out the door so people can get home loans? It’s really grown a lot over the last year and we’ve got good momentum. Therefore, we are satisfied with the growth of the mortgage portfolio. WesBank too: their production is actually very high.

However, what we noticed during the pandemic [there] this advantage is now for savings. So you’ve seen almost all banks talking about better performance on their deposits. This is the behavior we saw in Covid. So there was an immediate feeling that we were planning for both precautionary savings and not going into debt – and that theme played out and continues to play out. So I think that’s really a very positive story for consumers, but it’s also a positive story for the country because we haven’t had enough savings in this country for a long time. So it’s a really good story.

And then in terms of unsecured lending, we certainly haven’t seen demand for unsecured lending for credit card spending, personal loans. We haven’t seen a return to pre-Covid levels at all. And again, that’s probably not a bad thing for the consumer because it’s the most expensive form of loan for customers.

So in many ways I think there has been a positive change in customer behavior.

FIFI PETERS: As you said, FNB customers come to you a lot more to buy a house, a car. But the cost of this loan is increasing. It grows every quarter as a result of rising interest rates. I would like your opinion on this. With rising interest rates increasing the cost of borrowing, how long do you expect this side of the business to grow?

ALAN PULLINGER: yes. This is certainly a good point. Interest rates are going up, and that’s because inflation is going up. But I think it’s also important for us to sort of step back and just get some context here. So we’re looking at the final rate, the final rate that the central bank will raise interest rates to around 6.75%, maybe 7%. And if you look later and say, well, what does that mean, the so-called first loan rate that we have in the market? This will result in a prime rate of just over 10%. Now, I think if we put it in context, of course it’s higher than where we were. But if you go back to 2019, that’s where the first interest rate was. So, in many ways, interest rates are just normalizing to pre-COVID levels.

The massively low interest rate we had during Covid was not normal. So normalization is indeed happening.

Even if it returns to 10%, we cannot say that interest rates in the economy are very high. Sure, they’re higher than they are now, but we never talked about that in 2019. In 2019, we were comfortable where they were. So I think that’s the first point.

The second point, of course, when you talk about secured assets, those assets are also affected by inflation. So these asset prices usually also rise with some inflation. So that’s where we are. We think this will continue for some time to come. It is not at all prices. When I talk about mortgages, obviously there is demand, a lot of demand, I think from 1 million rand to say 2, maybe 2.5 million rand; this real estate sector is quite busy. I think if you go much higher it will decrease dramatically and below that there will also be quite a lot of demand, maybe not enough supply in the market.

FIFI PETERS: All right, Alan. Unfortunately I’ll have to stop there sir, but thank you for letting us know what’s going on in the financial economy, the behavior of most customers, especially FNB customers, with money right now. And it seems to be much more positive than before the pandemic. Alan Pullinger is CEO of FirstRand.

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