Sanlam Private Wealth backs FirstRand 

FirstRand, the most valuable banking group in Africa, present a compelling investment opportunity and will deliver superior returns in the future as its share price has been beaten down by the negative news surrounding South Africa. 

This is feedback from investment analyst at Sanlam Private Wealth, Gary Davids, who said that South Africa’s banking sector has proven to be remarkably resilient in the past decade. 

While banks might not be ‘the next big thing’, they are high-quality assets and have strong fundamentals, Davids said. 

Investing in these kinds of companies may not yield the highest profits immediately, but these assets typically excel over the long term and offer stability during market volatility.

However, Davids said that FirstRand is set to outperform its peers as its share price has been beaten down by the negativity surrounding South Africa and the uncertainty around the country’s election. 

“In our view, the business offers stability, potential growth, and good returns at an attractive valuation,” he explained. 

This is a significant shift from the past few years when Sanlam Private Wealth favoured Standard Bank and Absa to outperform following the pandemic.  

Unlike its competitors, Davids said that FirstRand has limited earnings sensitivity to interest rate cuts, resulting in a more stable net interest margin. 

While others may have done better during the period of rising interest rates, the current environment, with interest rates set to be cut, favours FirstRand. 

We estimate that (all things being equal) a 1% cut in interest rates could see FirstRand’s headline earnings fall by only 2%, compared to 7% for Nedbank and 4.5% for Standard Bank.

The group also maintains a strong capital position, boasting a Common Equity Tier 1 ratio of 13.2%, comfortably above the 9% regulatory minimum set by the South African Reserve Bank. 

This surplus capital serves as a protective buffer against unforeseen losses or economic downturns.

Excess capital also offers the flexibility to seize growth opportunities, such as expanding into Africa, investing in innovative technologies and infrastructure or absorbing tighter regulation. 

Specifically, during periods when other banks are tightening their lending criteria, FirstRand can leverage its strong capital position to increase its lending activities and solidify its market share. 

The banking group also does not find itself compelled to engage in aggressive deposit acquisition tactics to fuel its business growth.

In addition, Davids said the company has demonstrated commendable cost efficiency by adjusting its operating models and implementing cost controls. This safeguards the company’s profitability and gives it a competitive edge.

FirstRand’s robust operating margins, propelled by a lower cost-to-income ratio than its peers, have consistently enabled it to achieve superior returns on equity. 

Based on Sanlam Private Wealth’s projections, the company should sustain returns in the vicinity of 20% in the coming years.

This growth trajectory will be underpinned by expanding loan growth as well as cross-selling and upselling opportunities, particularly FNB products like insurance, to its 11 million customers. 

In general, FirstRand is, in our view, a resilient value generator, offering an appealing dividend yield to investors. 

With a track record of delivering value to its shareholders, the bank is well-positioned to fortify its balance sheet and maintain strong returns on equity.