Among SA’s bank stocks on the JSE, FirstRand is trading at the highest premium, and its most recent financial results make it easy to see why.

The banking group, which owns FNB, Rand Merchant Bank, WesBank and UK specialist bank Aldermore, posted a 7% increase in net profit for 2018.

FirstRand’s largest business, FNB, grew profit by 12% to R8.7bn, while some of its peers recorded only single-digit growth (though theirs were full-year results while FNB’s were interims). Absa increased its profit for the year by only 3%, to R16.1bn and Standard Bank’s earnings rose 6% to R27.9bn.

Nedbank is the only one that outperformed FNB — profit was up 14.5% to R13.5bn. However, FNB delivered more than double the returns to its shareholders in 2018 than Nedbank did. Its return on equity (ROE) at the half-year mark shot the lights out, at 42.2%, while Nedbank’s full-year ROE stood at 17.9%. Absa’s ROE was 16.8% while Standard Bank’s was 18%. At group level, FirstRand’s ROE was also higher than that of other banking groups, at 22.3%.

But it will be interesting to see how FirstRand will fare against Capitec when the two companies reach the end of their financial years. Capitec’s return to shareholders stood at 27% at the company’s half-year mark in August.

Karl Gevers, head of research at Benguela Global Fund Managers, says that at an ROE of 22.3%, FirstRand is the best-quality bank of the big four. "That justifies FirstRand trading at a premium to book value.

Alan Pullinger: FNB has grown customers by 4%. Picture: Freddy Mavunda
Alan Pullinger: FNB has grown customers by 4%. Picture: Freddy Mavunda

"However, it is at best fairly valued; [but could also be seen as] slightly expensive. At 5.1%, the group’s dividend yield is more attractive than at historical levels, while its forward p:e is also ahead of its historic average," he says.

FNB is the biggest growth engine for FirstRand’s profits. It is the main generator of ROE for the group, and over 6-million people, out of FirstRand’s combined 8.2-million customers, are individual consumers in FNB’s consumer banking segment. "That FNB has grown customers by 4% is very impressive in this sluggish economy," says FirstRand CEO Alan Pullinger.

The bank has been migrating a lot of its customers from the consumer banking segment to premium banking. The premium segment grew customers by 20% in the six months to December. Data from Genesis Financial News & Data shows that FNB commands 21% of banking market share in terms of deposits, loans and advances.

FNB’s strategy of forming a primary-bank relationship with its customers has helped it sell more products to its existing customer base as opposed to relying on customer gains to increase its revenue.

FNB CEO Jacques Celliers says the bank is still getting a lot of customers from competitors who come for one thing and to whom FNB sells other products. "A transactional account is the anchor of that relationship. It allows us to get a lot of data on the clients and to see their payment behaviour. We also sell investment, insurance and credit to them."

Celliers says FNB’s customers in the lower consumer segment used two products on average while those at the top end of the customer segment used about 12 or 15 each.

FNB managed to sell more unsecured lending products such as personal loans to its premier customers in the six months under review. The bank advanced 62% more personal loans to its premier customers during the period.

"We had always aspired to serve our customers’ unsecured lending needs, but we had gaps in distribution. However, we’ve improved our analytics and distribution models around our digital platforms so that our clients don’t have to go to other providers. This is a new capability, one that we’ve been working on for a number of years," says Celliers.

He says the bank reviewed its pricing model to make its personal loan product more affordable and repositioned it to remove stigma.

"In this low-mortgage world, we see customers using personal loans more to improve their homes."

Gevers says even when transactional banking revenues come under pressure because of competition from new entrants like TymeBank, Bank Zero and Discovery, he thinks FNB will be able to continue gaining market share from the other big banks, albeit at a slightly lower rate.

"FNB is in a stronger competitive position than the rest of the big four banks. FirstRand has a lower cost-to-income ratio, so it can still manage a lower-fee environment better than Standard Bank, Nedbank and Absa."