Lower Inflation And Political Stability Will Stimulate Credit Growth Opportunities

Key Takeaways

• Improved affordability and economic recovery could drive increased consumer and corporate credit demand, positively impacting revenue growth.
  
• Strategic focus on SME lending and non-interest revenue growth is set to boost earnings and diversify income sources.
  
• Geopolitical and economic challenges, including high inflation and competition, could impact FirstRand's revenue, margins, and increase operating expenses.

Catalysts

Provides transactional, lending, investment, and insurance products and services in South Africa, rest of Africa, the United Kingdom, and internationally.

• The potential for improved affordability due to a rate-cutting cycle and lower inflation could lead to increased consumer credit demand and revenue growth, as consumer spending power is expected to rise.
  
• Early signs of economic recovery and increased business confidence in South Africa, attributed to political stability and reforms, may catalyze the expansion of corporate and commercial credit growth, impacting revenue positively.
  
• The strategic focus on increased lending to SMEs, supported by data and digital underwriting enhancements, is expected to capture growth opportunities arising from economic reforms, potentially boosting earnings and margins.
  
• The implementation of the ALM strategy, which optimizes shareholder returns across interest rate cycles through active management, suggests an anticipated stabilization of net interest margins (NIM) despite interest rate fluctuations.
  
• Growth in non-interest revenue (NIR), driven by FNB's expanding customer base, insurance business contributions, and RMB's fees from private equity and advisory services, is expected to enhance earnings and diversify income sources.

FirstRand Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FirstRand's revenue will grow by 12.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.7% today to 29.5% in 3 years time.
• Analysts expect earnings to reach ZAR 54.4 billion (and earnings per share of ZAR 9.2) by about March 2028, up from ZAR 39.8 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.8x on those 2028 earnings, up from 10.5x today. This future PE is greater than the current PE for the ZA Diversified Financial industry at 11.1x.
• Analysts expect the number of shares outstanding to decline by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 18.53%, as per the Simply Wall St company report.

FirstRand Future Earnings Per Share Growth

Risks

• Geopolitical headwinds and uncertainty may impact FirstRand's revenue and profits as global growth slows, particularly in China and the euro area.
  
• High inflation and fiscal challenges in African countries like Nigeria, Zambia, and Ghana could result in subdued economic activity, impacting FirstRand's revenue growth prospects in those areas.
  
• Weak South African domestic demand and market competition might affect net interest income (NII) and margin pressures in certain lending sectors.
  
• Legal challenges in the U.K., specifically the potential negative outcomes from the supreme court appeal regarding motor commission matters, could necessitate further provisioning and impact earnings.
  
• Reinvestment requirements in technology to support business growth may increase operating expenses, impacting net margins if not managed effectively.

Valuation

• The analysts have a consensus price target of ZAR86.842 for FirstRand based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ZAR96.0, and the most bearish reporting a price target of just ZAR77.08.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ZAR184.6 billion, earnings will come to ZAR54.4 billion, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 18.5%.
• Given the current share price of ZAR74.45, the analyst price target of ZAR86.84 is 14.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.