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Background and overview of FirstRand Group (FSR)
FSR owns a number of well known financial services entities. They include:
- FNB - Retail Bank (been voted the most innovative bank in South Africa)
- Rand Merchant Bank - Corporate and investment bank
- Wesbank - Installment finance business
- Ashburton Investments - Investment management business.
Scroll over or click on the funnel chart to get more details of FSR's latest financial results
Financial review:
FSR showed very strong results for the 6 months ended 31 December 2015, with a net profit margin of around 33%. That is an extremely strong net profit margin, especially considering the though economic climate and the fact that interest rates are on the rise as the South African Reserve Bank aims to curb inflation (or protect the Rand) . The pie chart below shows the contributions of FSR's operating divisions to their turnover and profits.
Its clear from the pie chart that FNB is the main money spinner for the FirstRand group, contributing 56% of the group's total profits, while RMB brings in just over 25% and Wesbank around 17%. Ashburton and other activities brings in just under 2% of total profits. What FSR and all banks for that matter has to take into account is the rising interest rate cycle and the impact this will have on consumer's ability to pay back their loans, be it home loans, vehicle loans, personal loans etc. And less money to pay loans back will imply less money to invest, so RMB and Ashburton will feel the impact of this too.
Non performing loans (NPL's) are sitting at just over 3% of total loans issued. This has started to trend upwards as 6 months earlier this ratio was just under 3% and it will only get worse as high inflation eats into disposable income and the cost of debt starts increasing.
We therefore need to caution investors in either FSR or RMH (and all banks for that matter), that the percentage of non performing loans will increase and these losses will have to come through the income statement and that will put pressure on their earnings/profits. But it's not all doom and gloom. FSR generated around R2.14 per share in cash, which is a pretty strong number, with their cash reserves sitting at R61billion (or almost R11 per share). They are extremely cash flush, and this should see them easily cruise through any tough times coming up with increases in interest rates and NPL's that are sure to follow the interest rates higher.
Non performing loans (NPL's) are sitting at just over 3% of total loans issued. This has started to trend upwards as 6 months earlier this ratio was just under 3% and it will only get worse as high inflation eats into disposable income and the cost of debt starts increasing.
We therefore need to caution investors in either FSR or RMH (and all banks for that matter), that the percentage of non performing loans will increase and these losses will have to come through the income statement and that will put pressure on their earnings/profits. But it's not all doom and gloom. FSR generated around R2.14 per share in cash, which is a pretty strong number, with their cash reserves sitting at R61billion (or almost R11 per share). They are extremely cash flush, and this should see them easily cruise through any tough times coming up with increases in interest rates and NPL's that are sure to follow the interest rates higher.
Valuation:
We like FSR's assets, and feel the company is well run and covers all the major financial services. The question is whether its worthwhile buying the holding company RMH, instead of just buying FSR shares directly? In order to justify buying the holding company instead of the operating entity, the holding company's share price has to offer a significant discount to make it worth investors while.
We value FSR shares at between R44.42 and R45 a share. If you a long term value investor, investing in RMH might make more sense, as you getting exposure to FSR at a discount rate. If you like to buy the operating entity itself, we feel there is value in FSR over the long term and would recommend buying or adding to holdings at levels lower than our pretty conservative valuations.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.
We value FSR shares at between R44.42 and R45 a share. If you a long term value investor, investing in RMH might make more sense, as you getting exposure to FSR at a discount rate. If you like to buy the operating entity itself, we feel there is value in FSR over the long term and would recommend buying or adding to holdings at levels lower than our pretty conservative valuations.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.