FirstRand

Where we land

FirstRand is, above all, a South African retail bank. Africa Banks, the division that houses its home bank FNB, supplies 70% of revenue, and almost everything else about the company follows from how South African households and businesses are faring. We award it gold, our highest grade.

The grade rests on a gap between what the share price asks of the business and what a bank of this quality has tended to deliver. At today's price, investors are in effect accepting earnings that shrink over the next five years. We find that a modest bar. The complication is that analysts have lately been trimming their profit forecasts while the shares have kept climbing.

What the business is

Three lines make up the group. The largest is Africa Banks: FNB, the everyday bank that takes deposits, issues cards and mortgages, lends to small businesses and sells insurance and payment services, mainly in South Africa but also in neighbouring countries. The second is RMB, the investment banking and corporate finance business, which brings in 24% of revenue from lending to large companies and projects, advising on deals and trading in markets for clients. A smaller commercial finance line accounts for the remaining 6%.

Across the group, the operating margin is 23%: the share of revenue left once the costs of running the bank, from staff and branches to technology and losses on bad loans, have been paid. That is respectable rather than exceptional; FirstRand's standing as a high-quality bank rests on other things.

Why now

With no fresh company news to move it, FirstRand is trading as a straightforward bet on the health of South African borrowers. Brent crude has climbed to $114 a barrel. It reaches South Africa through fuel prices and inflation, and bears directly on whether FNB's customers keep paying their loans.

On the quality of the business, meaning the steadiness of its profits, the returns it earns and the strength of its balance sheet, FirstRand is among the strongest companies we rate. Where it has weakened is growth: its standing on that measure, against every listed company we cover, has fallen sharply over the past year.

It joined our Gold Income 10 portfolio this month, chosen by that portfolio's rules on the strength of its gold grade and a dividend standing that ranks third among the candidates. A well-capitalised bank with a long profit record is a natural fit for an income portfolio, provided the profits keep coming.

The case for

The most direct argument is that analysts still expect profits to grow. Consensus has earnings per share, the profit attributable to each share, rising by about 9%, from 9.33 this year to 10.14 next. That is a long way from the shrinking earnings the share price is willing to tolerate, and the distance between the two is the heart of the gold grade.

The second argument is the shares' own behaviour. Their price-performance standing has risen strongly over both three and twelve months, recovering from a mid-year dip to sit close to the top of the market. Investors have been buying.

Neither strand is clean. Expected growth of that size is well ahead of recent sales growth, and the run of downward revisions puts it at risk; a rising price built on forecasts that are being cut is exposed. The case for is not that everything is improving, but that the bar the price sets is low enough to absorb a good deal of disappointment.

Where the growth could come from

The company does not frame its prospects this way; what follows is our reading of the likely drivers and what would confirm or refute each.

The main engine is FNB at home, where much of the profit comes from the gap between what the bank pays depositors and charges borrowers. Higher fuel costs and tighter money could stretch household budgets and push loan losses up, and with sales growing only 2% last year there is little cushion from volume. The question is whether interest income can keep outrunning bad debts. Confirmation would be a credit loss ratio, the share of loans the bank expects to lose, staying near its usual range while interest income and deposits grow faster than costs.

RMB is the second, more volatile engine. Sharp moves in oil, copper and bond yields tend to bring clients in to hedge and trade, and Africa's need for power, logistics and mining capacity creates large lending opportunities; either could offset slower retail growth. But a souring of big corporate loans would hit hard, because each one is large. Rising markets and advisory income, with growing corporate lending and no new large write-downs, would show it pulling its weight.

Within FNB there is a quieter lever: moving customers onto its app, rewards, insurance and payment services, which earn fees rather than interest. Fee income that grows with active customers is steadier than lending profit and could support earnings even if loan demand stays weak. Fee and digital income are not split out, so the evidence is growth in active digital customers and non-interest revenue running ahead of total revenue.

Further out are neighbouring markets such as Botswana, Namibia, Zambia and Mozambique, where more people are only now entering the banking system. Several are tied to commodities, and copper is up 39% over the year. They could lift the group above its recent growth of about 4% a year, though currency and government-finance risks are high. The signal would be rest-of-Africa profit growth well ahead of South Africa with stable loan losses.

Finally, an overhang rather than an engine: the UK scheme to compensate car-finance customers over past commission practices touches FirstRand's UK lending arm. The bank has made provisions before, and any top-up would come straight out of earnings and the capital that funds dividends. The UK business is not shown separately. A final framework that existing provisions cover would lift a cloud; meanwhile the Bank of England's cut to 3.75% trims margins on UK savings and lending.

The case against

Against the seven European banks we compare it with, FirstRand ranks first on quality, ahead of NatWest and CaixaBank. It has been profitable in each of its last 10 half-yearly results and earns a return on equity, the annual profit on shareholders' money, of 18.6%.

That lead does not come from margin. ING, CaixaBank, Lloyds and Intesa Sanpaolo run operating margins of 30% to 41%; FirstRand's 23% sits alongside Nordea's roughly 22%, and only Santander is lower. Its reputation rests on returns, balance sheet and consistency, real virtues but also the first things a bout of bad loans would test.

The more pressing problem is growth. Over six months its growth standing has fallen from well above average to below the middle of the market, with the sharpest drop on 8 September 2026. In the past six weeks, 9 of 12 changes to analysts' earnings forecasts were cuts. The slowdown is in the reported numbers too: sales grew 1.7% over the past year, against 3.8% a year over three years.

Nor are the shares cheap. At 14 times earnings, against a peer median of 13, FirstRand is priced in line with the most expensive of its group, ING and CaixaBank, and well above NatWest at 9 times. Its price-to-book ratio, the share price against the accounting value of what shareholders own, is 2.4 times. Its value standing remains above average but has eased steadily over three, six and twelve months. The bear's argument is simple: a bank with slowing growth and falling forecasts is priced as one of the best in its group, and the shares keep rising regardless.

What the price assumes

Suppose the share price stays flat for five years and the shares then trade at 18.4 times earnings, the median for every profitable listed company we cover. For today's price to make sense on those terms, earnings per share could fall by 5% a year, leaving them at 4.99 in five years.

FirstRand's earnings have moved too unevenly to show a trend worth projecting, so we offer no forecast of our own. What matters is the shape of the bar: the price asks for shrinkage, while analysts, even after their cuts, still expect growth next year. The shares have risen 22% over the past year and 5% over six months, so some of the gap has closed. What remains is a price that does not require things to go well, only that they do not go badly for long.

The other side of the medal

The single risk that matters most is that stretched households at home turn into rising bad loans in the line that earns 70% of revenue, just as forecasters lean towards cuts. It attacks the business at its centre: FNB is most of the group, and its customers now face higher fuel prices.

The early signs are already in the forecast cuts, and a near-peer-high valuation offers little shelter if the pressure builds. A rising loan-loss ratio at the next results would be the clearest sign the risk is arriving.

What to watch

The next half-yearly results are the test: whether loan losses stay near their usual share of lending, and whether interest income keeps growing faster than costs. Alongside them, watch whether forecast changes swing back from nine cuts against three raises.

The case would weaken if downgrades keep outnumbering upgrades, if the expected high-single-digit earnings growth fails to come through, or if the unbroken profit record and high returns begin to slip; the argument for paying a peer-high price for quality would then fall away. Until then, the price asks for less than the business has been delivering, and that is where our gold grade comes from.

The numbers

The same industry, for comparison

Research for information, not personal investment advice or a recommendation to buy, sell or hold any security: see Important information. Data as at 30 September 2026.