FirstRand profit falls 5% as R17.64bn provision curbs gains

Africa’s most valuable bank is pushing to wrap up the sale of its Aldermore Group Plc unit in the UK around the end of the year after a costly regulatory crackdown on car financing.

FirstRand has received interest in the business from “very credible players” and sees December as the end-date for its 20-year foray into the UK consumer-finance business, Chief Executive Officer Mary Vilakazi said on Bloomberg TV Thursday.

“We expect nine binding offers to be submitted by the end of September following which a due-diligence process will start, and then final binding offers will be submitted by December,” she said at a separate briefing.

FirstRand bought Aldermore Group in 2017 for about £1.1 billion ($1.5 billion) as it sought to build revenue beyond South Africa, its biggest market, when political instability battered confidence in the economy. It folded in its MotoNovo Finance unit — a major provider of motor finance in the UK that it purchased in 2006 — into Aldermore in 2019.

The investment became costly for FirstRand after a Financial Conduct Authority probe into commission practices in the UK motor-finance sector resulted in a call for lenders to pay about £9.1 billion to consumers, with 12.1 million loans eligible.

The decision forced FirstRand to increase provisions for the case to £807 million by June 30, more than triple amount it had initially set aside to cover the amount of compensation the unit would have to pay to consumers over claims they were mis-sold car loans.

FirstRand has called the FCA’s redress framework as “disproportionate and unfair,” cautioning that maintaining a retail-banking footprint under the altered risk landscape no longer fits the group’s return metrics.

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It decided to sell the business and disclosed it as a discontinued operation for the year through June.

“This pivot in strategy and resource allocation should over time unlock higher levels of earnings growth and enhanced return on equity,” Vilakazi said in an earnings report released Thursday.

The steep surge in provisions saw the lender post its first profit drop in six years.

Earnings declined 5% to R39.7 billion ($2.5 billion).

After classifying Aldermore as a discontinued operation and presenting it separately, FirstRand’s normalised earnings from continuing operations climbed 13% to R44.5 billion, it said.

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Aldermore Group earnings decreased 11% in the year to £156 million as balance-sheet growth was offset by margin compression due to competitive deposit pricing and as the business grappled with higher impairments off a low base.

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Vilakazi maintains that the franchise is a “good business” and expects it to become even more valuable in the hands of a buyer that has a good deposit base that it can build on.

“In the hands of the right owner, particularly one that can provide it with further capital and access to a funding base,” Aldermore will “really be a stellar business,” Vilakazi said.

Read: UK motor finance payouts set at R170bn

In May, it hired Bank of America Corp. and its own investment-banking arm, Rand Merchant Bank, as advisers to help on the divestiture, with SkyNews reporting that CVC Capital, as well as Lloyds Banking Group Plc are likely to have made an offer for the unit.

FirstRand raised its forecasts, saying it will target earnings growth in low double digits in the medium term and will seek return on equity of 21% to 26%.

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