RICK VAN NIEKERK: FirstRand is the largest banking group in the country and owns, among others, First National Bank, Rand Merchant Bank and WesBank. Today, the group announced the results of its financial year to the end of June. As with some other major banking groups, the results highlight a strong recovery from the Covid-19 periods.
FirstRand’s normalized headline earnings are now up 23% to 33 billion rand. First National Bank (FNB) contributed 19.6 billion rand, or 60% of this profit, while FNB’s growth was around 22%. Rand Merchant Bank contributed 8.2 billion rand, or 25%, and this group also experienced significant growth. The headline profit was 17% higher than in the previous period. Shareholders can smile too. The board of directors declared a record dividend of 4.67 rand per share, consisting of an ordinary dividend of 3.42 rand per share and a special dividend of 1.25 rand.
James Formby on the line. He is the chief executive of Rand Merchant Bank (RMB). James, thank you so much for joining me. It’s been a strong recovery and profit levels appear to be above pre-COVID levels. Is everything back to normal?
JAMES FORMBY: Rick, hello to all listeners. Yes, it was a strong recovery. I think this is the year we really put Covid behind us. In renminbi, our results for the past year were already above pre-Covid levels, but now I think we’ve really seen a full normalization of our results, and we’re really seeing good growth across the businesses.
RICK VAN NIEKERK: Banks’ profits were significantly affected by reserves and impairment. I see that at the pre-collateralization level for FNB and RMB the growth was much lower. It was mostly pedestrian for FNB. Pre-reserve growth was around 4%, while the renminbi fell 2%. What does this indicate – that at the operational level, times are difficult?
JAMES FORMBY: I think it’s clear that some of the growth that we’re seeing in these results is a result of provisions that we no longer need because the quality of our advance book has improved significantly over the last period and, particularly from a renminbi perspective, is in good shape. form. We have effectively canceled last year’s regulations.
I think the bigger picture is pretty… still challenging, but it’s encouraging to see some signs of growth.
And in corporate and investment banking, our advance portfolio grew by 18% this year, which means that in new business and refinancing, we wrote 126 billion rand of new business refinancing.
I think it shows some signs of confidence returning to the South African economy and that corporate South Africa is starting to invest in the future again, which is really positive.
RICK VAN NIEKERK: Thus, advances grew by 18%. This is a significant number, but there is an opinion that the economy is still just surviving. There is not enough electricity, there are political worries. But when you look at this number, it seems that things are still happening on the ground.
JAMES FORMBY: yes. What was interesting is that the progressive growth that I was talking about happening in the big corporate space actually usually happened in a bigger concern, so a few bigger, smaller, less risky companies and a pretty broad cross-section of the economy. Some of it was in manufacturing, some of it was in telecommunications companies, but it was pretty widespread. So, I agree with you – everyone is frustrated with the power outages, but companies are investing. This growth that we’re seeing this year, Rick, even predates some of the infrastructure investments that we’re expecting going forward, based on some of the renewable energy, private power topics… we’re seeing huge pipelines developing here, where we’re talking to to a number of our customers, and this topic will develop much more in the coming years.
So I think this is in the early stages of a more constructive cycle for corporate South Africa.
RICK VAN NIEKERK: yes. Renewable energy is going to be a big part of that, and I know you’ve funded some major renewable energy projects. What do you see in this segment of the market, because with the recent liberalization of the sector and the regulations on who can build these plants, there should be an “explosion of activity” in this sector?
JAMES FORMBY: Rick, you are right. The President’s announcement on July 25 really changed the situation. As I said, we were actively engaging with our client base, and there was already a significant pipeline of private power — in other words, corporations building up power for their own purposes. But at the same time, we’re seeing a doubling of the Independent Renewable Energy Producer Program [REIPPP] Round 6 which now closes in early October. We expect that there will be considerable interest in this.
So the combination of that actually means our teams are very busy. and we see a lot of interest and opportunity in both of these topics, which is very exciting. Unfortunately, this does not mean that the unloading will end immediately. It will probably take about two and a half years before that electricity actually enters our grid. But it does mean there’s a start to a solution to those pesky outages.
RICK VAN NIEKERK: yes. And I think it will also stimulate the economy – not only the electricity supplier, but the investment will also have a significant impact on many other sectors such as manufacturing. My guess is that this could be the first chapter of a very expanded infrastructure investment program if the government really pulls the trigger. But where else in the economy do you see good opportunities?
JAMES FORMBY: This is a fairly broad cross-section. But now we’re seeing our clients – and I guess they may have held back some of that during the Covid period – are starting to invest in all sectors.
I mentioned production. I think the telecommunications sector has been very dynamic.
And many of our clients are thinking about how to play and structure their lending around the ESG (Environmental, Social and Governance) theme, which we’re seeing seeping through strongly.
I know green renewable energy is one sub-sector of that, but we’ve seen a lot of our clients focus on that, both because they believe in it and the importance of the topic, but also because it creates a new way of structuring and borrowing, their lending is efficient.
RICK VAN NIEKERK: Then there is a high possibility that we may be included in the FATF [Financial Action Task Force] gray list next year due to concerns about our ability to detect and prevent illegal money transfers and money laundering. This is an international issue and there is a set of rules that countries have to follow and it seems that South Africa’s efforts have fallen short. And there are fears that this could have a significant impact on South Africa, particularly the banking sector. What are your views on this?
Read:
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JAMES FORMBY: Rick, I think there’s no doubt that this kind of issue is a concern for global investors looking at South Africa, and it also makes it more difficult for banks like us to interact with the global financial system. So, I see that we may be greylisted. We should not be complacent about this. This country cannot afford to ignore this risk. It doesn’t mean it’s a terminal problem. We need to actively solve it and get out of the gray zone, if you will, and back into the green zone – and for this we need many different things.
This requires legislation, prosecution, etc. It is good to see that the National Treasury is paying attention to this. But I think they should not be a lone voice, the National Treasury, the banking industry. It affects us all and we must come together to get out of this gray area and back into the green.
RICK VAN NIEKERK: You do business in several countries in Africa. Is there a significant difference in how things are going in those countries that are also on the gray list?
JAMES FORMBY: It’s hard to say. As a global business, we have set the highest standards for Anti-Money Laundering, KYC [know your customer] politicians. We don’t see our behavior or our approach being any different in any of the markets in which we operate. We make sure to meet the highest standards of this. And in the RMB world of dealing with large institutions and large corporations, our clients understand this and appreciate that they too need to follow suit. So that’s definitely something that we don’t see, or we don’t really see our different places as different cases in that.
It’s hard for me to comment specifically at the FATF level, how they look at it. I know that Mauritius was a country that they blacklisted and Mauritius came off the gray list after two years of hard work. I think that was the kind of effort and work that a country like South Africa should also put in.
Read: Graylisting can work for SA
RICK VAN NIEKERK: Well, now it seems that a lot of effort is being made to fix the problems, but maybe it started too late.
Finally, this is your last responsibility as CEO of Rand Merchant Bank as you leave the company at the end of September. You’ve done a fantastic job there. What are your plans for October 1?
JAMES FORMBY: Rick, my seven years as CEO of RMB and just over 25 years at RMB have come to an end. It was an integral part of my adult life.
My priority is to take time out and slow down a bit and then think about what the next chapter might be. I think it’s very hard to focus on that when you’re in the hot seat. So I’m hoping to rest a bit and then see what the next chapter might bring. I know the yuan is in really good hands. Emra has such a depth of talent [Brown] taking over​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​award, I can applaud next year’s results from the sidelines.
RICK VAN NIEKERK: yes. But running a bank in South Africa is not easy. You’re almost out the door, so you can probably answer him honestly.
JAMES FORMBY: [Chuckling] yes. There are always complications in any business, and banking has its share.
RICK VAN NIEKERK: Yes, definitely. James, thank you so much for your time and good luck with your vacation and thinking about what your next venture will be. I am sure it will be successful.
JAMES FORMBY: Thanks a lot Rick.
RICK VAN NIEKERK: It was James Formby, chief executive of the Rand Merchant Bank.
