FirstRand’s prudent lending strategy shields against bad loan surge post-Covid

FirstRand Ltd., South Africa’s largest bank by market value, took a cautious lending approach post-Covid, avoiding a surge in bad loans plaguing competitors. Prioritising low- and medium-risk clients, their credit loss ratio rose to 78 basis points, staying within their target range of 80-110 basis points. CEO Alan Pullinger emphasised careful lending in the face of a challenging economic outlook, ensuring resilience amidst adversity. Despite challenges, FirstRand’s expansion across Africa and prudent strategies position it for a positive long-term outlook.

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FirstRand Dodges Credit Loss as Choosy Lending Pays Off

By Adelaide Changole

(Bloomberg) — A decision by South Africa’s biggest bank by market value to lend cautiously in the aftermath of the Covid-19 pandemic helped it avoid a sharp increase in bad loans that’s bedeviling some peers.

FirstRand Ltd. opted to forgo high loans growth and went instead for low- and medium-risk customers. Its credit loss ratio, a measure of bad loans as a percentage of the total book, climbed to 78 basis points for the 12 months to June, from 56 basis points a year earlier, but below its target range of 80-110 basis points. 

Rival Standard Bank Group Ltd. had 97 basis points by June, close to the upper end of its target range of 100 basis points, while Nedbank Group Ltd. exceeded its 1% upper target to 1.21% and Absa Group Ltd.’s ratio stood at 1.27%.

“We knew coming out of Covid that households and businesses were not just going to bounce back to where they were in 2019,” FirstRand Chief Executive Officer Alan Pullinger said in an interview. “So when we came out we said ‘let us lend money very carefully into the household sector, and into the business sector.’”

The credit loss ratio is to likely to rise in the coming year, but will be in the middle of its target range, and will be driven by consumer and business strain as a weak macroeconomic outlook dampens recovery, Pullinger said. 

More on FirstRand’s Performance:

  • FirstRand’s overall impairment charge increased 55% to 10.9 billion rand ($577 million), fueled by its South African retail segment and a surge in bad loans in the UK business.
    • “It’s a very tough environment at the moment in the UK with consumers having to face that cost of living combination of high interest rates, higher inflation, higher energy prices. These things are really weighing on  households in the UK,” Pullinger said.
  • About 70% of lending in the UK is for real estate and a property shortage will cushion values there, he said.
  • FirstRand franchises in other African countries — which delivered 32% growth in pretax profit despite debt restructuring in Ghana, high interest rates and inflation — will keep expanding.
    • “Over the next year, it is still going to be tough, but longer term, we are constructively positive on our broader Africa portfolio.”

FirstRand’s shares dropped as much as 4.5% before paring losses to 4% by 3:28 p.m. in Johannesburg.

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