Cash-flush FirstRand is not in a hurry to hoist its flag in every country

FIRSTRAND CEO Sizwe Nxasana has this little R10.2-billion headache.

The problem is the bank has lots of money but cannot find good acquisitions to spend it on.

Nxasana and his deputy, Johan Burger, are deciding whether they should "deploy more capital into the rest of Africa more aggressively".

High capital levels normally depress return on equity (ROE). But in this case Peter Mushangwe, Legae Securities's equity analyst, said he prefers to look at unlevered profitability - that is, the core profitability that ignores effects from capital management - rather than the ROE.

FirstRand's targeted range for ROE is 18%-22%, but it reported an increase to 24.2%.

Its return on assets , which shows how profitable assets are in generating revenue, improved to 2.1%.

Nxasana said that, given the way the local economy is performing and with more consumers under strain, it expected nonperforming loans and bad debt to surge. He said growth impairments would put pressure on reported ROE. "When we look at the R10.2-billion... [it] is somewhat of a drag on the 24.2% [ROE] already," Nxasana said.

He disputed suggestions that he might be looking for huge acquisitions in Nigeria. In 2011, it walked away from buying a stake in Sterling Bank after the two parties failed to agree on price. It is also not expected to make any big acquisitions in Kenya or East Africa .

Chris Steward, head of equity research at Investec Asset Management, said that as a shareholder of FirstRand he drew comfort from the fact that the interests of management and shareholders were more aligned than before.

Mushangwe echoed Steward's sentiments. "I would be concerned if management's track record on capital allocation is unproven. I think in this case, I would give management the benefit of the doubt."

Independent analyst Ian Cruickshanks said selling prices were still too high. "Patience will be rewarded. What looks like a bargain now may be a disaster tomorrow," he said. Nxasana said that unlike some competitors it was not aiming to have a flag in every country.

But FirstRand disappointed the market by not awarding shareholders a special dividend. Its share price fell almost 3% after it announced that full-year profit climbed 24% and bad debt declined. Earnings a share rose 22% to R18.7-billion.

Steward suspected the drop in share price may have been driven by profit-taking on the day.

Barclays Africa rose 23.5%, Nedbank 6.7% and Standard Bank 3.6%

It is suspected that part of the reason Nxasana and his team decided not to pay a hefty special dividend was that South Africa had just come out of what some people would call a "mini-banking crisis", with African Bank falling under the central bank's curatorship and rating agency Moody's downgrade of South African banks.

Another reason is that the group has a number of black economic empowerment (BEE) deals that mature at the end of the year. FirstRand did a R7.9-billion BEE deal in 2005 in which BEE partners bought a 10% stake. The value created from the deal is about R14-billion.

Some of the BEE shareholders cashed in, and the group would want to have some capital available to manage the movement of its shares .