Firstrand Ltd price pulling back after FY23 trading update

Salient features

1. The group’s expectations for full-year earnings and ROE, published at the time of the interim results in March 2023, remain unchanged despite the deteriorating macro factors
2. The group's net interest income (NII) has benefited from growth in customer deposits, advances growth, and continued positive momentum in its deposit gathering activities, while non-interest revenue (NIR) growth is slightly ahead of management expectations
3. Costs continue to trend significantly higher than inflation, mainly caused by increased incentives given improved performance, higher US dollar- and pound sterling-denominated spend, headcount increases, and ongoing investment in growth strategies. However, the group expects the cost-to-income ratio for FY23 to be like the prior year

Firstrand FY23 Voluntary Trading Update:

The global economic landscape has taken a turn for the worse in recent months, as monetary policy tightens, and inflation continues to rise at an alarming rate. Central banks around the world have been forced to hike interest rates to curb this economic downturn, with South Africa's FirstRand (JSE: FSR) also feeling the effects of this economic strain.

Despite the weakening macroeconomic backdrop, FirstRand remains optimistic about its financial performance for the year ending 30 June 2023. The group has managed to maintain its earnings and ROE expectations, thanks to the resilience of its customer-facing businesses and the disciplined allocation of financial resources.

A key aspect of FirstRand's success has been its targeted origination strategy, which was adopted in 2021 and early 2022. This strategy has allowed the group to benefit from robust growth in customer deposits and the positive endowment impact resulting from higher interest rates. In turn, this has boosted the group's net interest income (NII) and contributed to an improved net interest margin (NIM).

As for non-interest revenue (NIR), FirstRand has managed to exceed management expectations. The group has achieved this through increased fee and commission income at FNB, as well as through insurance revenue and reserve releases from better claims experience. RMB has also seen an increase in NIR due to customer gains and structuring activities, but the challenging environment has negatively impacted its markets business in the second half of the financial year.

While costs have trended significantly higher than inflation, FirstRand expects its cost-to-income ratio for FY23 to be like the prior year. The group has also signaled an increase in its cost of risk in the second half of the year, but it remains confident that its credit loss ratio will stay below its stated through-the-cycle range.

In the face of adversity, FirstRand's collections teams have performed exceptionally well in difficult circumstances, and the group's capital and liquidity levels remain strong and above internal targets.

Firstrand – technical view

The share price of Firstrand has recently broken the longer-term downtrend which had been in place since April last year. In the short term we now see the price pulling back from overbought territory.

The current pullback could be a second long entry opportunity forming from the initial breakout. Traders might prefer to see the current pullback ending with a bullish price reversal above the 6500 level, before finding long entry and targeting a move back towards resistance levels located at 7000 and 7105 respectively. In this scenario a close below the reversal low or 6500 level might be used as a stop loss indication for the trade.

Should the current pullback from overbought territory instead not conclude with a bullish price reversal, and instead take the price back below the 6500 level, the bullish assumptions would be deemed to have failed.