Africa’s economic troubles took a turn for the worse, with the continent’s biggest bank saying it will rein in lending.
FirstRand Ltd.’s Chief Executive Officer Johan Burger said the bank is curbing credit in response to an increase in defaults, a commodity-price slump and slowing consumer demand in its biggest markets, which include South Africa, Nigeria and Zambia.
“This year we’ve taken a further decision to make further cuts on credit granting, so asset growth will drop,” Burger said Tuesday by phone. “The retail cycle has turned and the rest of Africa has also seen some uptick in non-performing loans.”
South Africa’s economy expanded an annualized 0.6 percent in the fourth quarter, the slowest pace since 2009. The decline in commodity prices has hammered Nigeria, with growth in Africa’s biggest economy expected to decline 50 percent. FirstRand will now be more cautious about extending its operations across the continent and has raised provisions for non-performing loans, Burger said.
“The uptick is nothing to be concerned about and there’s a muted impact on our income statement because we proactively raised provisions,” he said.
In the six months through December, FirstRand’s net income rose 1.7 percent to 10.5 billion rand ($683 million) from 10.3 billion rand a year earlier, the company said in a statement on Tuesday. Earnings per share excluding one-time items climbed 3 percent to 1.85 rand and the dividend increased to 1.08 rand a share from 0.93 rand. Non-performing loans increased 8 percent.
While results for the fiscal first half were in line with expectations, “transaction volumes aren’t really increasing because of lower economic growth,” said Adrian Cloete, a bank analyst at PSG Wealth in Cape Town which manages more than 300 billion rand. The decline in the credit loss ratio was a “positive surprise” and although the company’s outlook is bleak, FirstRand may show as much as 10 percent growth in normalized earnings for the full year, he said.
FirstRand has operations in nine African countries and runs a consumer bank, a vehicle-financing unit, an asset manager and an investment bank. It has steered away from acquiring assets, growing organically across the continent.
In the second half, “growth is likely to decline, as further cuts are made given the deteriorating outlook, and corporate activity is unlikely to pick up significantly,” FirstRand said in the statement. “Retail and corporate bad debts are likely to increase further.”
FirstRand fell as much as 5.5 percent, its biggest drop in almost three weeks, and was 2.2 percent lower at 48.16 rand at 1:19 p.m. in Johannesburg.
The bank has “hit a brick wall,” said Greg Saffy, banking analyst and head of Johannesburg-based Cast Iron Capital. “The group is clearly facing major headwinds. This, coupled with a relatively high price to earnings ratio, doesn’t make for an attractive investment case in the short to medium term.”