FirstRand Bank and Aldermore

FirstRand Bank and Aldermore

FirstRand is the largest bank in South Africa with a model encompassing consumer (54%), corporate (29%) and asset-based finance (17%).

Rand Merchant Bank and First National Bank combine a strong brand in corporate and retail. FirstRand's is diverse segmentally (insurance, asset management) and geographically (UK and Sub Sahara).

FirstRand International has just closed the acquisition of UK-based challenger bank Aldermore Plc, to complement FRB's existing asset finance operation in the UK, Moto-Novo. The acquisition of another UK operation seems a defensive move given the potential for more African M&A which may be on the back burner for now. What this says about African opportunity remains to be seen.

Strong earnings are driven by robust margins (especially on unsecured lending), underpinned too by a low cost of funding from its deposit base. Strong profitability (ROA of 2.1%, ROE of 23%) has supported a best in class capital ratio. The bank commands a sound Efficiency Ratio. 

Despite its geographical diversification, FirstRand still has significant exposure to the South African government through investments, securities, and loans to the public sector. This is exposure to a downgraded jurisdiction. South Africa contributes 90% to the bottom line.

The Aldermore acquisition comes as FirstRand seeks to build offshore funding,  reducing its dependency on the South African government rating. 

The valuation at a PE ratio of <10x and a P/B of 1.8x hardly looks exuberant.

The purchase reduces FirstRand's CET1 ratio to <12%.

Aldermore is profitable (ROE of 19%) and commands a low 40% cost-to-income ratio.

Aldermore is branchless and is bases operations on online distribution. Main operational areas are buy-to-let lending to mainly professional landlords (40% of Income), asset finance (25% of Income), residential mortgages (including lending-in-retirement product), SME commercial mortgages, and lower yielding Invoice Finance.