Earnings per share on an adjusted basis for 1H2017, are expected to be between 7.4% and 10.3% higher than the comparative interim period (1H2016), with a realisation of double digit growth likely to see a favourable term reaction by the market, while the results falling towards the lower end or below this earnings range likely to be met with short term disappointment.
Firstrand currently trades at a forward price to earnings multiple (P/E) of around 12 times which places the group at a basic valuation premium to that of its major banking peers, Barclays Africa (Forward P/E of 8.2), Nedbank (forward P/E of 10.1) and Standard Bank (forward P/E of 10.3). Historical earnings growth over the last few years has surpassed that of the group’s aforementioned sector peers and markets will be looking to see whether the group is maintaining this superior earnings growth to justify the more expensive pricing, particularly as the group offers a lesser (although still healthy) dividend yield than its competitors.
The transactional business (non-interest income) will remain a key focus for investors. In the groups FY16 results, non-interest income accounted for more than 45% of group income despite interchange headwinds. Markets will be hoping to see further strength in this department as the lending environment, which makes up the bulk of group income, becomes vulnerable for the company and the sector, in lieu of the current muted state of economic growth to which banking returns are linked.
South Africa’s leading innovative bank has consistently produced a Return on Equity (ROE) in excess of 20% and we hope to see this type of return maintained for investors. Despite the groups historical best in class performance in a number of areas, slow economic growth in South Africa, combined with the threat of a credit ratings downgrade later in the year, suggests that at current levels, Firstrand maybe trading at a fair value right now, that is unless we see a significant beat on the group’s earnings expectations for the interim period.