FNB analysts Peet Serfontein and Sithembile Bopela recommended FirstRand as a trade idea with good upside potential.
FirstRand is one of the largest financial institutions in South Africa and provides a range of banking and insurance products.
It services retail, commercial, corporate, and public sector customers in South Africa and many African countries.
FirstRand holds a portfolio of leading franchises, including Rand Merchant Bank (RMB), First National Bank (FNB), and WesBank.
FirstRand is amongst the highest-quality banking counters in South Africa, bolstered by strong fundamentals, including a healthy balance sheet and solid profitability metrics.
High historical earnings growth and good cash generation metrics further boost the counter’s appeal.
Serfontein and Bopela provided a technical analysis, which revealed an incomplete falling wedge pattern that makes the share attractive as an investing opportunity.
“This is a bullish continuation pattern formed after a downtrend correction,” the two FNB analysts said.
“The expectation is for the price to develop further and progress upwards from current levels to strengthen the breakout. Our profit target resides along the way.”
They highlighted that buying FirstRand is regarded as a tactical idea.
Tactical trading is a relatively short- to medium-term investing style based on anticipated market trends or relatively short-lived changes in the outlook based on fundamental or technical analysis.
Upside price momentum, according to the Moving Average Convergence Divergence (MACD) histogram, also supports a bullish bias.
RSI (relative strength index) forward calculations suggest that the share will be in overbought territory at around R85.00, which classifies a profit target of R72.55 as realistic.
“We suggest a low capital at risk allocation to this trade. However, we would increase exposure at a break above R66.00,” Serfontein and Bopela said.
Fundamental view of FirstRand
Serfontein and Bopela said the quality of the business is sound due to the sustainable barriers to entry into banking, good quality of management and a reasonable expectation for growth in earnings over the next three years.
The group maintains a relatively high ROE (20.6% in FY22) – ahead of most of its peers – and its capital position continues to improve and is expected to remain healthy.
In terms of performance, the FirstRand group benefitted from improved operating conditions and lower credit impairment charges for 2022.
Solid advances in growth, higher interest rates, and a strong performance from the UK operations contributed positively to net interest income (NII) growth.
“We are positive about the South African banks. We expect good loan growth to boost net interest income despite modest net interest margin headwinds this year,” they said.
The energy crisis in South Africa, particularly amid a further deterioration of electricity from Eskom, has spurred higher private sector investment in self-generation capabilities across households, small businesses, and large corporates.
“With the secular shift towards renewables, and as pricing for solar energy components has become more favourable, SA banks remain well-positioned to benefit from the renewable energy financing required for these projects,” they said.
“Downside risk to our fundamental view include a further deterioration in macroeconomic conditions in South Africa, which could lead to pressure on advances growth and credit conditions.”