FirstRand’s bet on Africa bearing fruit

FirstRand’s cautious bet on expanding into Africa appears to be paying off. The company is beginning to reap the benefits of faster-growing economies outside of its home market of South Africa. 

In addition to South Africa, the group operates in eight key African countries: Botswana, Namibia, Swaziland, Lesotho, Zambia, Mozambique, Tanzania, Ghana, and Nigeria. 

The expansion has predominantly been done through FNB, with RMB slowly following as the banking group grows its presence in specific countries. 

FirstRand’s African expansion has occurred later and at a slower pace than some of its peers, with CEO Mary Vilakazi saying this is deliberate. 

Vilakazi took over at the helm of Africa’s most valuable bank in April this year after a stint as its CFO. 

At FirstRand’s investor presentation, Vilakazi outlined the bank’s expansion into Africa and how it plans to continue expanding while ensuring it generates value for shareholders. 

She explained that the company had a healthy caution when it began expanding into Africa as many South African corporates have had their fingers burnt trying to grow rapidly on the continent. 

FirstRand’s expansion plan involves growing slowly to ensure its local operations remain profitable for shareholders and do not require much additional capital. 

Thus, its operations outside of South Africa are reliant on having a relatively small in-country presence that can be used as a platform for growth. 

Crucially, in the financial year to the end of June 2024, FirstRand’s broader Africa businesses had a higher combined return on equity than its South African divisions. 

FNB has led this expansion in recent years, with RMB joining in and following its large corporate clients onto the continent. 

Broader Africa contributed 11% to FNB’s profit before tax in the most recent financial year, and the bank’s client base grew to over two million retail customers. 

It also has 169,000 commercial clients, reflecting its current strategy of deepening its ties in the regions it operates and its focus on cross-selling products to its clients. 

Vilakazi said the bank continues to adopt a cautious approach to lending on the continent, focusing on growing its deposit base and transactional volumes. 

RMB’s broader Africa results were also strong, with operations outside of South Africa contributing 33% to earnings. 

The impressive growth of FirstRand’s broader African businesses can be seen in the graph below.

FirstRand plans to ramp up its expansion into Africa through potential acquisitions, using the billions in excess cash on its balance sheet. 

Prior to becoming CEO, Vilakazi said the banking group was looking at ways of expanding more aggressively on the continent. 

“Maybe there are other ways in which we can participate in financial services without necessarily setting up branches and having a banking license,” Vilakazi said.

The challenge is in finding possible targets at a reasonable price, she added. 

This does not mean the bank is not going to invest in South Africa, with economic reforms and a more business-friendly government set to improve business conditions. 

At the investor presentation for the most recent financial year, Vilakazi said the company is focused on having enough resources to participate in any uptick in economic growth and increased deal-making. 

FirstRand’s more aggressive expansion into Africa is set to increase its competition with local rivals Standard Bank and Nedbank. 

Standard Bank has led the expansion of South African financial institutions into Africa, with it beginning its growth on the continent nearly four decades ago. 

It remains dominant in many of the markets in which it operates and is also eyeing further growth opportunities on the continent. 

“We’re absolutely focused on total shareholder, absolutely focused on it and on managing our portfolio of businesses with discipline,” Tshabalala told Daily Investor. 

“Clearly, the fastest-growing parts of the African continent are the countries outside of Africa and, in particular, East Africa, which is growing at an annual rate above 5%.” 

“Therefore, you want to be allocating your capital to these faster-growing parts of your business for obvious reasons – to grow lending, insurance products, and making acquisitions.”