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Gary Davids

Investment Analyst

At Sanlam Private Wealth, we’ve been positive on the South African banking sector over the past few years, and in the face of severe macroeconomic volatility, our banks have proven to be remarkably resilient businesses. We remain constructive on the sector. One of the shares currently on our radar is FirstRand, one of the largest financial institutions in South Africa. In our view, FirstRand is a compelling investment opportunity and is set to deliver superior returns over the long term.

In the fast-paced world of investments, the allure of discovering ‘the next big thing’ often leads investors down a path where the line between potential and peril becomes blurred. Sometimes hype can cloud investors’ minds, leading them to make decisions based on emotion rather than on company fundamentals and quality (at the right price).

Investing in quality assets may not yield the highest profits immediately, but these assets typically excel over the long term and offer stability during market volatility. One such enticing investment opportunity is FirstRand. The banking group is pricing in a lot of negative news, especially around the uncertainties brought on by South Africa’s upcoming national elections and the current stage of the global investment cycle. In our view, the business offers stability, potential growth, and good returns at an attractive valuation.


Before we focus on the investment case for FirstRand, let’s recap our views on the banking sector over the past few years. While we were in the throes of Covid-19, our analysis of the sector stood in stark contrast to the prevailing sentiment. While many investors harboured fears of a protracted recovery, envisioning years of diminished earnings, we remained steadfast in our conviction that local banks were well capitalised to withstand a material deterioration in the environment relative to previous crisis periods. With share valuations at historic lows at the time, we viewed the future return prospects of the sector favourably.

Against this backdrop, we selectively added banking shares to our clients’ portfolios. We saw the most potential in Standard Bank and Absa at the time. Our preference was anchored in fundamentals and the prevailing macro environment, and in our view, these businesses offered better prospects than their peers after the pandemic lows.


Given the prevailing expectation of a downward trajectory in interest rates over the coming year, FirstRand has now also emerged as an attractive investment. Unlike its competitors, 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 positions FirstRand advantageously. 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.

Moreover, the group maintains a robust capital position, boasting a Common Equity Tier 1 ratio of 13.2%, comfortably above both internal targets and 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.

Beyond safeguarding stability, excess capital offers the flexibility to seize growth opportunities, such as expanding into Africa or investing in innovative technologies and infrastructure or absorbing tighter regulation. It also gives the business the ability to enhance shareholder value through continuing to declare dividends, pay special dividends and buy back shares.

While high capital levels are not exclusive to FirstRand, the institution stands out as a deposit-taking bank with a notably low loan-to-deposit ratio. This robust financial standing not only allows FirstRand to maintain stability but also presents opportunities for growth. Specifically, during periods when other banks are tightening their lending criteria, FirstRand can leverage its strong capital position to increase its lending activities and further solidify its market share. Importantly, due to its healthy balance sheet, FirstRand does not find itself compelled to engage in aggressive deposit acquisition tactics to fuel its business growth.


In recent years, the company has demonstrated commendable cost efficiency. By adeptly adjusting its operating models and implementing cost controls, the business has not only safeguarded its profitability but also secured 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, setting it apart as a standout performer in the banking sector. Based on our projections, the company should sustain returns in the vicinity of 20% in the coming years.

Despite the challenging operating landscape, we anticipate that FirstRand will be able to achieve double-digit earnings growth over the medium term. 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. FNB’s adeptness at fostering customer loyalty, notably through its digital banking ecosystem and the eBucks loyalty programme, is expected to drive transaction volumes and fortify its customer base, thus bolstering overall profitability.

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. Its robust capital levels offer ample resilience against potential losses stemming from economic downturns, while its operating model harbours inherent growth potential. We perceive FirstRand as a good business and an attractive investment opportunity, promising superior returns over the long haul.

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