Speed and level of recovery in earnings and ROE has exceeded initial expectations
Rand Merchant Bank (RMB), the corporate and investment banking arm of FirstRand Limited, delivered resilient interim results to December 2020 as pre-provision operating profit (PPOP) grew by 9% in what continues to be a challenging economy.
RMB CEO James Formby said:
“What is pleasing is the quality of our diversified portfolio across business lines as well as geographies, in line with our strategy.” He noted the sustained balance sheet strength and that the bank has continued to provision prudently across its credit portfolio.
The strong operational performance, underpinned by growth in deposits and resilient annuity income, was offset by higher credit impairments – resulting in a decline of profit before tax of 6% from the same period in 2019.
Normalised earnings were 7% down and a ROE of 16.4% was achieved.
Resilient performance in an ongoing constrained market
The performance was driven by an excellent contribution from Markets, specifically from the fixed income desk. The Markets business was up 27% compared to the December 2019 period. Banking (Corporate Transactional Banking and Investment Banking and Advisory) had a solid operational performance although overall PBT decreased 9% due to conservative provisioning.
RMB also saw a strong performance from the rest of Africa with an increase in profit before tax of 14%, contributing 30% of RMB’s pre-tax earnings, supported by a strong cross-border performance. The private equity portfolio remains healthy with its estimated market value at R3.9 billion above book value.
RMB’s decline in profits was primarily due to additional credit provisions of more than R800 million. These provisions were mainly taken against the performing book, with more than half arising from a more conservative forward-looking macro view, as required by IFRS9.
“The portfolio held up better than expected with the potential emergence of non-performing loans not materialising in the core lending portfolio,“ Formby said.
Deposit growth has been pleasing with a rise of 6%, although margins have come under pressure due to the numerous interest rate cuts in South Africa and most of the other African countries in which RMB operates. Advances reduced 3% since June 2020 as corporates repaid additional liquidity facilities drawn down during COVID-19 lockdowns and new business origination remained relatively muted.
“Notably costs in the period have been well contained while we are still investing in new initiatives and platform upgrades.”
Doing good business for a better world
“Our clients remain the centre of our business and the economy. We continue to support them through this challenging period with direct funding, payment holidays and covenant waivers,” said Formby.
“We processed several large reapplications for clients in sectors where short-term operating cash flows continue to be adversely impacted by COVID-19 lockdown regulations. Over the reporting period, we granted R8.8bn of relief, primarily in the form of short-term debt repayment moratoriums and new bridge finance advanced. Encouragingly we noted a significant decline in the number of requests as liquidity needs stabilise.”