FirstRand Ltd., South Africa’s second-biggest financial-services company, said the Nigerian banking crisis may boost the group’s expansion plans in the country as it seeks to improve earnings after bad loans and investment losses cut full-year profit by 43 percent.
“Nigeria is the big one, and the timing may turn out to be very good given the Nigerian banking crisis,” Paul Harris, chief executive officer of the banking group, said in a telephone interview in Johannesburg today. “Kenya and Ghana are on the radar screen. We’re taking it one at a time.”
Like rival Standard Bank Group Ltd., FirstRand has more money on hand than regulators require and is targeting expansion in Africa, China and India as U.K. and U.S. banks are contracting amid the global financial crisis.
FirstRand plans to start offering full banking services in Tanzania and is awaiting regulatory approval for a representative office in Angola. It already has conditional approval for an office in Nigeria.
In August, the Central Bank of Nigeria fired the chief executive officers of five Nigerian banks after mounting bad debts put them at risk of collapse.
FirstRand’s net income fell to 6.5 billion rand ($871 million) in the 12 months through June, from 11.3 billion rand a year earlier. Earnings per share, excluding one-time items, dropped 29 percent to 1.33 rand, beating the 1.28 rand median estimate of seven analysts surveyed by Bloomberg. FirstRand cut its dividend 32 percent to 56 cents per share.
Earnings dropped because of an increase in retail bad debts and losses from legacy portfolios in the investment bank, some of which were related to the collapse of a derivatives broker, Dealstream Securities Ltd., at the end of 2008, FirstRand said. Harris said executive bonuses in the group will reflect the lower financial performance.
“I do believe the developing market strategy is the way to go because at least FirstRand has some advantage in those markets as opposed to developed markets where the competitive advantage is difficult to see,” said Jan Meintjes, a portfolio manager and director at Gryphon Asset Management in Cape Town, which owns FirstRand shares.
FirstRand is not planning any large acquisitions in the next six months, Harris said, adding that it doesn’t need to raise money to boost trade between its clients in Africa, India and China. In July, FirstRand and the world’s third-largest bank by value, China Construction Bank Corp., agreed to cooperate on growth opportunities in Africa. The prospects from that agreement are “very good” Harris said.
With South Africa having decreased interest rates six times to 7 percent since December, Harris said bad debt ratios were easing in its mortgage and car-financing businesses, which is allowing the bank to loosen its lending criteria in those areas.
“The people who are still around now are survivors and can jump through the hoops,” Harris said about the lending environment. “The tough operating environment will continue for the remainder of 2009 with a slow improvement from 2010.”
Meintjes said FirstRand’s earnings rebound may not come before other South African banks, “but given the extent of the reduction, I do expect the recovery to be bigger than Absa and Standard Bank.”
FirstRand and Johannesburg-based rivals such as Absa Group Ltd. and Standard Bank all reported lower earnings this year after South Africa’s first recession in 17 years made it more difficult for customers to repay loans. All of South Africa’s four largest banks are profitable and did not invest in subprime mortgages.
FirstRand has declined 6.5 percent in Johannesburg trading this year, making it the worst performer on the five-member FTSE/JSE Banks Index, which has gained 7.8 percent over the same period. The stock fell 1.6 percent to 15.05 rand as of 10.45 a.m. in Johannesburg trading.