- FirstRand cutting back on credit as bad debt cycle turns sour
- Lender's asset growth will decline as a result, says CEO
Africa’s economic troubles took a turn for the worse, with the continent’s biggest bank saying it will rein in lending.
FirstRand Ltd. Chief Executive Officer Johan Burger said the bank is curbing credit in response to an increase in defaults, a commodity-price slump and slowing consumer demand in its biggest markets, which include South Africa, Nigeria and Zambia.
“This year, we’ve taken a further decision to make further cuts on credit granting, so asset growth will drop,” Burger said Tuesday by phone. “The retail cycle has turned and the rest of Africa has also seen some uptick in non-performing loans.”
South Africa’s economy expanded an annualized 0.6 percent in the fourth quarter, the slowest pace since 2009. The decline in commodity prices has hammered Nigeria, with growth in Africa’s biggest economy expected to decline by 50 percent. FirstRand will now be more cautious about extending its operations across the continent and has raised provisions for non-performing loans, Burger said.
“The uptick is nothing to be concerned about and there’s a muted impact on our income statement because we proactively raised provisions,” he said.
In the six months through December, FirstRand’s net income rose 1.7 percent to 10.5 billion rand ($683 million) from 10.3 billion rand a year earlier, the company said in a statement on Tuesday. Earnings per share excluding one-time items climbed 3 percent to 1.85 rand and the dividend increased to 1.08 rand a share from 0.93 rand. Non-performing loans increased 8 percent.
“The group is clearly facing major headwinds,” said Greg Saffy, banking analyst and head of Johannesburg-based Cast Iron Capital. “This, coupled with a relatively high price-to-earnings ratio, doesn’t make for an attractive investment case in the short to medium term.”
FirstRand has operations in nine African countries and runs a consumer bank, a vehicle-financing unit, an asset manager and an investment bank. It has steered away from acquiring assets, growing organically across the continent.
In the second half, “growth is likely to decline, as further cuts are made given the deteriorating outlook, and corporate activity is unlikely to pick up significantly,” FirstRand said in the statement. “Retail and corporate bad debts are likely to increase further.”
Access to financial services may decline across the continent even as its population grows. FirstRand is reining in credit, Barclays Plc is selling its African assets, Standard Chartered Plc is closing some branches and insurer Old Mutual Plc is reviewing its operations and may decide to sell a stake in Nedbank Group Ltd.
South Africa’s central bank and National Treasury last week said they were in talks with Barclays to try to limit the impact of a withdrawal from Africa’s most developed nation as the U.K. lender prepares to reduce its stake in Barclays Africa Group Ltd.
“We tend to consider ourselves and Africa as a paradise for investors -– I think it is the exact opposite,” David Shapiro, deputy chairman of Sasfin Securities in Johannesburg, said Feb. 29. It “has to do with poor growth prospects here, the falling rand, corruption and misconduct in Africa.”
FirstRand fell as much as 5.5 percent, its biggest drop in almost three weeks, and was 3.6 percent lower at 47.48 rand at 3:05 p.m. in Johannesburg, making it the biggest decliner among South African banks.