FirstRand raises provision over UK vehicle finance probe

SA’s most valuable banking group, FirstRand, has followed Investec’s suit and raised a provision in response to a probe by UK authorities looking into whether there were abuses that negatively affect consumers in the granting of vehicle finance loans in that country.

FirstRand, worth about R420bn on the JSE, did not specify how much provision it has made, in case the Financial Conduct Authority (FCA) penalises it.

However, the lender in its trading voluntary for the year to end-June said that while it recorded higher earnings in the second half of the financial year, the performance would be offset by the decision to raise an accounting provision for the UK review of commissions.

It said the recent comments by the FCA reminding companies they must maintain adequate financial resources at all times influenced its decision to raise the provision.

“Given the prevailing uncertainty and the above statement, the group has taken the decision to raise an accounting provision based on probability-weighted scenario principles constructed from its own data analysis, and that includes potential legal and redress costs,” the group said.

“The amount provided is a best estimate of what can be raised as a conservatively struck accounting provision. The methodology used to inform the provision will be reviewed as part of the group’s year end audit and governance process. It is worth noting that other firms operating in the motor finance sector in the UK, also participating in the FCA process, have raised accounting provisions.”

Investec last month said it had set aside £30m for potential compensation and other costs related to the FCA’s investigation into its vehicle lending business. UK lenders are at risk of facing a potential bill of £13bn over the saga. The FCA probe is looking at whether commission payments to brokers were too high.

FirstRand said most of the vehicle loans the FCA is probing are in its London branch in the form of the MotoNovo back book. It said the MotoNovo loan book was not transferred to Aldermore when it acquired the MotoNovo business from FirstRand in May 2019.

The group said not all loans originated through dealers in the review period used discretionary commission arrangements.

“The group continues to believe that MotoNovo’s historical practices were compliant with the law and regulations in place at the time. However, uncertainty persists while the FCA process runs its course and legal risk remains as individual cases continue to be tested and taken on appeal,” FirstRand said.

The lender said it expects its return on equity will remain within the target range of 18%-22%. The group said its customer franchises were in good health and remain operationally resilient.

“FirstRand’s portfolio produced a stronger underlying performance than anticipated in the second half of the financial year. This resulted in higher earnings growth emanating from operations compared with guidance provided in February 2024 when the group announced its interim results,” it said.

“Earnings growth is, however, offset by the decision to raise an accounting provision for the previously disclosed UK motor commissions review process.”

Sanlam Private Wealth last month said that given the prevailing expectation of a downward trajectory in interest rates over the coming year, FirstRand, unlike its competitors, had limited earnings sensitivity to interest rate cuts, “resulting in a more stable net interest margin”.

Khumalok@businesslive.co.za