FIFI PETERS: FirstRand rewarded its shareholders for being patient with it during some of the toughest times of the Covid-19 pandemic, when banks stopped paying dividends to preserve as much money as possible in case of the worst case scenario materialising, which didn’t happen.
Now FirstRand, whose businesses include Rand Merchant Bank, as well as FNB and the vehicle financer WesBank, paid a total R26.2 billion in dividends to its shareholders. This is the highest payout level in its history.
We’ve got the CEO, Alan Pullinger, on the Market Update for more on the results. Alan, thanks so much for your time. So you’ve made up for not paying dividends at that time – and then some – and you’re saying essentially that this is the highest dividend paid since the group was established back in 1998. Is that so?
ALAN PULLINGER: Hi Fifi, and good evening to your listeners. Yes, that’s right. We are pretty delighted that we were able to sort of increase the annual dividend, and then on top of it the special dividend. So, really, if you look at it, I suppose it’s easy to think – I mean, how is it possible, given what’s happening in the economy, where does it come from? But it’s really a story of putting aside huge provisions at the time of Covid. Of course you have to set aside these provisions because there was an expectation that we could lose a lot of money on portfolios. Of course that turned out better than we [had] thought.
And then during Covid itself we reduced the level of payout that we had for our dividends. And you will recall that the banks, through a directive from the central bank, actually passed a dividend cycle where no dividends were declared because we wanted to retain capital in the banking system.
I think all of that has turned out better than we thought, and thankfully we find ourselves in a situation where we are generating a lot of capital. Yes, we are lending, but there certainly we’ve a build-up of capital way, way in excess of what we need to support that lending. And so we are delighted that we could return it to shareholders. So yes, that’s the outcome.
FIFI PETERS: Right, you have a build-up of capital. What’s that indicative of? Why is the cash pile getting larger at this stage?
ALAN PULLINGER: I think if you look at our return profile (so when we are earning a 20% return on equity) and when you look at that and the earnings growth that we’ve had (so our earnings are up 23%) clearly you are generating capital every year. Now we take a big chunk of that capital and we use that capital to support new lending. But the demand for capital, which is kind of the lending story, is insufficient to fully absorb the capital.
Of course our preferred option is always to deploy the capital into growth, because that predicates future higher earnings into the future. So that’s really the desire. But I guess when you’ve got an economy that’s growing at sort of 1.7%, 1.8%, unfortunately there isn’t enough growth to support that capital generation. And so, instead of sitting on it, which of course would be the alternative – we could sit and wait for that growth to happen, the consequence of that is, of course, where do we invest it? We would invest it in some form of government securities. Instead of doing that, of course, if we return it to shareholders, you get that multiplier effect on the dividend because that dividend then gets spent or reinvested, and so you kind of get that velocity of money.
So I think it’s a really good thing. It’s a good practice to get money back to shareholders. It’s not good for banks to sit on excess capital that they can’t deploy.
FIFI PETERS: Right. I’d like to understand what you’re saying, though, about the behaviour of consumers right now, and of businesses when it comes to money, because you’re essentially saying that they’re not running out or knocking on your doors really strongly, looking for loans to support all kinds of things. So how would you describe the financial behaviour of let’s start off with the FNB customer right now? And has it changed materially from before the pandemic began?
ALAN PULLINGER: Fifi, that’s a good question. When it comes to FNB – let’s leave commercial out, because commercial is lending to small businesses. That’s actually growing strongly and it actually grew through the pandemic. So our commercial lending is, I would used the word vibrant, and we expect that to continue.
When it comes to the retail customers, we have seen some changes. Number one, we’ve seen a strong preference for secured lending as opposed to unsecured lending. So when we talk about secured lending, we are going to be talking about things like mortgages, and we’re going to talk about vehicle finance. Both of those are up. And if you look at our production of mortgages, are you getting money out of the door so people can get home loans? That really has grown strongly over the past year and we’ve got good momentum. So we are pleased with how the mortgage portfolio is growing. WesBank as well: their production actually is very high.
What we’ve noticed, though, through the pandemic, [there] is this preference now for savings. So you’ve seen pretty much all of the banks talk about much better performance from their deposits. That is a behaviour that we saw building in Covid. So there was immediately the sense we’re going to both precautionary savings, we are not going to take on debt – and that theme has played out and it 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 for a long time we haven’t had enough savings in this country. So that’s really a good story.
And then, with respect to unsecured lending, we certainly haven’t seen unsecured lending demand for credit card spending, personal loans. We have not seen that get back to pre-Covid levels at all. And again, it’s probably not a bad thing for the consumer because that is the most expensive form of borrowing for customers.
So in many respects I think there’s been a positive shift in customer behaviour.
FIFI PETERS: Just on the demand that you are seeing right now for secured lending, as you said the FNB customers are coming to you a lot more to buy a home, to buy a car. But the cost of that loan is getting higher. It’s getting higher by the quarter, as a result of the interest rates ticking up. I’d like your view on that. With rising interest rates increasing the cost of borrowing right now, how long do you expect that side of the business to be growing?
ALAN PULLINGER: Yes. It is a good point, of course. Interest rates are headed up and it’s because inflation’s going up. But I think it is also important for us to sort of stand back and just get context here. So we see the terminal rate, the final rate that the central bank will hike interest rates to, getting to about 6.75%, maybe 7%. And if you then look and say, well, what does that translate into, the so-called prime lending rate that we have in the market? That’s going to get the prime lending rate to just over 10%. Now, I think if we put that in context, of course it’s higher than where we’ve been. But if you go back to 2019, that is where the prime interest rate was. So, in many respects, interest rates are only normalising back to pre-Covid levels.
This massively low interest rate that we had during Covid was not normal. So there’s actually a normalisation happening.
Even if it gets back to 10%, we can’t say that interest rates are terribly high in the economy. Of course they are higher than they are now, but we never said that in 2019. We were comfortable in 2019 with where they were. So I think that’s the first point.
The second point is, of course, when you talk about secured assets there’s also an inflationary impact that happens on those assets. So those asset prices typically would also lift with some inflation. So this is kind of where we are. We think it’ll continue for some time. It’s not across every price point. If I’m talking mortgages, there’s clearly a demand, a strong demand, I think, between sort of R1 million and maybe up to, say, R2 million, maybe R2.5 million; that property sector is quite vibrant. I think if you go much higher than that, it thins out dramatically and lower than that there’s also quite a lot of demand, probably not enough supply on the market.
FIFI PETERS: All right, Alan. Unfortunately, I’m going to have to cut it off there, sir, but thanks for giving us insights into what is happening in the financial economy, the behaviour of most customers, the FNB customer specifically, with their money right now. And it looks like it’s a lot more positive than before the pandemic. Alan Pullinger is CEO of FirstRand.