FirstRand Ltd. (FSR)’s investment-banking unit, Rand Merchant Bank, plans to sell all of its stakes in publicly traded stocks and may reduce staff to boost returns for shareholders, according to the head of the business.
Rand Merchant Bank will dispose of investments including its equity holdings “in an orderly manner,” Alan Pullinger, chief executive officer of the Johannesburg-based division, said in a telephone interview yesterday. Some staff have been informed and are considering alternative roles at RMB, he said, adding that any job cuts will be completed by July.
The division of South Africa’s second-biggest financial- services company is aiming to boost the rate of return and reduce its capital burden before Basel III international bank rules come into effect, said Pullinger, who has been CEO since 2008. The unit, started in 1977, said last month that it was exiting proprietary trading because it couldn’t produce sustainable returns.
Rand Merchant Bank’s largest equity holdings include 14.6 percent of Premium Properties Ltd. (PMM), 5.8 percent of Evraz Highveld Steel and Vanadium Ltd., 9.9 percent of Blackstar Group SE (BLCK), 30.3 percent of Control Instruments Group Ltd. (CNL) and 11.8 percent of Simmer & Jack Mines Ltd. (SIM), according to data compiled by Bloomberg.
Pullinger, 44, also said the unit is considering making acquisitions and may increase the risk it will take on as a single counterparty in some transactions. The bank may also charge clients for services that were free, as well as expand its asset-management business and prime brokerage, he said.
“What RMB really is doing is reacting to the changes brought about by Basel III, and in the new environment equity risk-taking is a very heavy consumer of capital and the risk- reward balance no longer makes sense,” said Neville Chester, a fund manager and FirstRand shareholder at Cape Town-based Coronation Fund Managers Ltd. (CML) While equities “used to be a high-return generator for RMB, it came with higher risk as we saw in 2008. The argument now is that investors will payer a higher price for stable, lower returns than volatile higher returns,” he said.
Rand Merchant Bank reported a 15 percent drop in pretax profit and a declining rate of return on equity in the second half. The unit contributed 23 percent of FirstRand’s earnings, down from 34 percent a year earlier.
Morgan Stanley Venture
The bank will discontinue proprietary trading while combining its fixed income, currency, commodity and equity trading units into a new division called global markets, Rand Merchant said in a statement on March 28. C.J. Giddy and Pierre Joubert will be the joint heads of global markets. Giddy was appointed head of fixed income, currencies and commodities in 2008, while Joubert has been head of equities trading.
Rand Merchant Bank’s securities joint venture with Morgan Stanley (MS), which has topped Bloomberg’s debt underwriting league table for the local market since 2010, will not be affected by the changes, Pullinger said.
“We will continue, and in fact grow, our trading and market-making business that enables our client franchise,” he said.
FirstRand fell as much as 2.2 percent to 23.05 rand, its lowest level in six weeks, and closed 0.2 percent higher at 23.60 rand in Johannesburg trading.
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