As consumers transact less and those with credit struggle to service their debt, FNB says it has to pull levers of growth elsewhere, most notably by taking market share in insurance and investments.
The bank’s parent company, FirstRand, warned during the presentation of its financial results on Tuesday that its businesses in South Africa, which include FNB, Wesbank and Rand Merchant Bank, had experienced "a material slowdown" since the beginning of 2020.
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FNB CEO Jacques Celliers told Fin24 that the bank, which has over 8 million customers, experienced challenges in its unsecured lending space. Impairments increased by 77% in FNB's credit card business, and by 47% in the personal loans business.
Although the rise in impairment charges is partly attributable to the bank advancing more unsecured credit in the six months to December, such a jump in bad debt provision also signals that more customers are struggling with their monthly repayments.
"We expected the rise in impairments because we have grown our client base and there’s always a new client strain…But it does also project further deterioration in the macros," said Celliers.
Dealing with the setbacks
He said the bank had adjusted its risk appetite, which means it will be more conservative when granting credit now. The "impairment strain", as Celliers called it, also contributed to FNB reporting a 5% increase in profit before tax compared to the two-digit growth that the bank has become used to. The CEO said it would take "a season or two" to arrest it.
He added that the impact of change in the bank’s credit extension policy was usually quicker to spot on personal loans, but could take a while on the credit cards side.
"But we are not going to stop lending because things are bad right now. Farmers don’t stop farming because there is drought. They find a way to work through it. We have to find ways to keep the economy going," said Celliers, adding that a slowdown in credit extension would put harsh brakes on an economy in dire need of a stimulus.
Celliers added that going forward, the bank would put more focus on grow its transactional revenue, which increased by 4% in the six months to December as volumes went up 8%. Though FNB’s transactional volumes grew, the pace of growth has slowed down from 11% in December 2018, and 10% in 2017. While Celliers said this was a function of people "going out less and transacting less" due to strained households' disposable income, it was also possible that a portion of transactions that would otherwise have been performed with older banks were being diverted to newcomers like Discovery Bank and TymeBank.
As transactional revenues come under pressure, another big area of growth for FNB will be insurance and investment revenues, which respectively increased by 12% and 15%.
"A tough economic environment presents a lot of opportunities. People are shopping around. Many people still pay a wrong price and we believe we can offer them a better value proposition," said Celliers.
Still a resilient bank
Sameer Singh, Research Analyst at Old Mutual Wealth Private Client Securities, said for FNB to grow earnings by 5% when it has less exposure to non-SA businesses compared to peers like Standard Bank, shows that it is a resilient bank.
This resilience, he said, can be attributed to FNB’s aggressive drive to migrate customers to digital channels, which has increased customer loyalty and enabled the bank to sell more of its products to a relatively more affluent customer base.
"This has contributed to growth in non-interest revenue, and is something that banks will increasingly need to focus on as consumers transact less in the face of shrinking disposable incomes.
"Overall, the results were acceptable in the context of SA. The impairment charge is concerning, but it’s hard to look at these things in isolation. It really is in the context of a strained consumer, with many of the other banks reporting a similar trend," said Singh.