Buy: FirstRand
FirstRand has faced multiple post-Covid challenges, including a strategic misstep when management tightened its risk appetite excessively, ceding market share to competitors. However, this approach was vindicated when inflation accelerated following Russia’s invasion of Ukraine, causing domestic banks’ credit loss ratios (CLRs) to deteriorate and leaving FirstRand with lower CLRs than its peers. Still, its earnings growth has lagged that of Standard Bank and Capitec. Concerns surrounding its UK motor finance unit, Aldermore, have also weighed on the share price over the past two years. FirstRand has announced Aldermore’s disposal, with proceeds to be redeployed into higher-return opportunities across its portfolio. This should anchor FirstRand’s return on equity (ROE) at the midpoint of its 21%–26% target range into 2027, with a forecast ROE of 23% in financial 2027.
Sell: Nedbank
Nedbank, the smallest of South Africa’s big five, faces a challenging outlook following its potentially expensive Kenyan NCBA acquisition. We believe acquisitions, including NCBA and iKhokha, could result in impairments. Nedbank’s ROE is forecast at 15% in 2026 and 15.9% in 2027, below its 17% medium-term target. Its inadequate retail banking scale leaves it vulnerable to competition from fintechs and challenger banks — including Pepkor’s PlusB and Discovery — while management attention shifts towards the NCBA integration. This could put pressure on the share price over the next 12 to 18 months.
Sipamla is a co-portfolio manager at Mergence Investment Managers
