FNB is opening the taps – with one catch

FNB is gradually opening its lending taps as interest rates come down and financial pressures on consumers ease. 

However, its lending continues to be focused on better-rated, lower-risk clients. Over 80% of the bank’s new retail business has gone to this cohort. 

The trend towards lower-risk clients is even more noticeable among FNB’s commercial business, which has steadily reduced its exposure to high-risk and medium-risk clients. 

A similar pattern can be observed across WesBank, albeit to a lower degree, as its focus on vehicle and asset financing tends to give it better collateral coverage.

This was revealed in FNB-owner FirstRand’s interim results presentation for the six months ended 31 December 2024. 

Africa’s most valuable banking group posted strong results, with basic earnings per share up 10% to 373.1 cents per share. 

The company reported that its return on equity (ROE) remained strong at 20.8%, compared to 20.6% in 2023.

FirstRand’s net asset value grew by 9% to R207.3 billion, while its profit for the period increased by 10% to R22.53 billion.

However, one area that came under pressure was FirstRand’s net interest income, which only rose 4% after impairments. 

This is despite interest rates coming down in the second half of 2024, as the Reserve Bank implemented two 25-basis-point cuts during that period. 

A large factor in this is FNB’s deliberately disciplined and targeted credit origination strategy that prioritises higher-quality credit to low-risk clients. 

This is a common theme across FirstRand’s businesses, and while limiting its upside slightly, it negates the downside of a higher credit loss ratio and increased impairments and ensures it maintains a high ROE. 

FNB’s net interest income from lending grew only 5% despite its deposits increasing by 10% in South Africa and 11% outside of its home market. 

“FNB’s credit performance reflects both its origination strategies and a changing economic environment,” FirstRand said. 

It explained that the macroeconomic pressures experienced in the past year have shown some signs of easing, slowing impairment growth and enabling increased lending. 

FNB’s impairments are trending better than expected, particularly among its retail clients, while the bank’s intense focus on lower-risk consumers is benefitting its commercial business. 

While FNB’s lending activity has picked up, it is focused on lower-risk clients, as the graphs below show. 

Credit extension to South African households was expected to grow strongly at the beginning of 2025 as interest rate cuts and increased optimism fuelled demand. 

However, the country’s largest banks have taken a cautious approach to lending so far, and customer demand has also not picked up as much as anticipated. 

Nedbank CFO Mike Davis explained to Daily Investor that the bank has had to repeatedly revise its expectations for household credit growth. 

At the beginning of 2024, amid optimism of central banks entering rate-cutting cycles, Nedbank expected high single-digit credit growth. 

By the time of the bank’s interim results for the first half of 2024, it had revised down this growth to around 5% year-on-year. 

Davis’ expectations in the second half of the year had plummeted to between 0% and 3% growth, indicating that the anticipated growth in household credit would not arrive in 2024. 

He expects a similar type of “lumpy growth” in the first half of 2025 as financial markets digest the impact of the second Trump presidency and the impact of economic reform is felt in South Africa. 

However, Davis warned that the interest rate-cutting cycle will not be as deep as initially expected due to the increase in global uncertainty. 

This will limit household credit growth and ensure the South African consumer remains under pressure. 

Another limiting factor is that South African consumers appear to be far more cautious about taking on new debt during this cutting cycle than in the past. 

Typically, a sharp rebound can be seen in applications for home loans, for example. However, this has not occurred this time around. 

Many homeowners got burnt in taking on significant debt when the Reserve Bank last cut rates sharply amid the pandemic-era lockdowns. 

When interest rates were hiked from November 2021 onwards, many could not afford the repayments on their houses. 

The graph below shows the cautious approach of South African banks to lending, with the repo rate and inflation included for context.