SA banks sitting pretty amid crisis, says Nedbank's Brown
May 6, 2009
By Etienne Swanepoel
Mike Brown, the finance director of Nedbank Group, will succeed Tom Boardman as chief executive of the bank next February. I interviewed Brown on April 21 to find out his views about the global financial crisis.
There are two broad issues facing our economy and our banks, he says.
First, the global banking crisis is probably more behind us than ahead thanks to the measures that have been adopted by overseas governments.
Second, we are now in the midst of a global economic slowdown, although, internationally, the rate of this slowdown may be moderating.
Brown says the key factors that caused overseas banks to fail are well documented. These included "excess liquidity and low interest rates, which resulted in cheap credit and a rapid increase in poor quality or subprime lending".
What came to pass was "excessive risk taking and an originate-and-sell mentality". It is "now clear that excessive leverage was facilitated by complex credit derivatives". Not only "did these instruments escape national regulation, but there was also a lack of international supervision".
Consequently, "inasmuch as highly leveraged transactions are prone to failure by small environmental changes, it did not take much for these transactions to rapidly spiral out of control".
Aside from these issues, "it appears that banks in many developed countries were surprisingly poorly regulated. This was partly due to the globalisation of banking, and the absence of effective co-ordination between the different regulators in each jurisdiction.
"It also turns out that the financial modelling, the assumptions used and the articulation of the risks attached to derivative instruments became increasingly focused on mathematical modelling, which, in many senses, was divorced from reality."
Brown completes his assessment of the origins of the crisis by referring to the Basel 2 accord, the international standard relating to the capital required by banks that became effective in January last year.
He notes: "A key failure was that its implementation was delayed in some jurisdictions, including the US.
"Those banks which embraced the spirit of Basel 2 were generally able to weather the storm better, as they had a deeper understanding of their individual risk profiles and the capital levels appropriate to these."
Locally, "our banks have remained structurally sound amid the international banking crisis and South Africa has largely escaped the worst of it. There are a number of reasons, such as sound financial regulation. We did not have the same originate-and-sell mentality, and we did not institutionalise the use of complex derivative instruments, which resulted in excessive leverage.
"South Africa fully implemented Basel 2 from January 2008. This was preceded by three or four years of preparatory work. It provided local banks with a detailed understanding of their specific banking risks and the appropriate amount of capital to hold against that risk."
Brown refers to the so-called A2 banking crisis in 2002, when several of South Africa's smaller banks faced a liquidity crisis. He says this crisis "provided local banks and regulators with good institutional experience of managing systemic risk".
He adds: "For a bank to work properly, you need strength in your executive team. Each member must understand their part of the business in depth. Then, internal aggregation and reporting functions need to roll up at the executive level so that it provides accountability and sufficient overview."
Brown is bullish on the local banking industry's growth prospects. Although Nedbank expects decreased earnings for this year, he says, it "will still be strongly profitable … When the world is tougher, you must think more about relative than absolute performance. Compared with foreign banks on a peer-to-peer basis, local banks have done exceptionally well."
He says that on the face of it, immediate earnings growth prospects for local banks "seem subdued as the decrease in interest rates reduces the endowment income of banks, that is, interest income on own capital". But in the next 18 to 24 months, he expects "improved earnings growth as the interest rate decreases feed into improvements in bad debt".
On the impact of the global crisis on growth at local banks, he notes: "For the international banks, in view of their domestic problems, we expect to see less activity in South Africa as there is likely to be a pull-back to their domestic franchises."
Where banks have received government funding, "there is already speculation on how these banks should continue their lending activities in, say, Asia. UK taxpayers, for example, are likely to say that these banks must now focus their lending in their home markets. This is good for local banks everywhere as it opens up their market share if the foreign players are less aggressive."
Interestingly, Brown says that as firms find the corporate bond market a harder place to raise funding in the wake of the crisis, "we expect reintermediation by banks as large corporates are more likely to borrow from banks that have the capital".
He adds that small business, the emerging black middle class and Africa "will present growth opportunities".
He expects gross domestic product to decline this year, but says there are "some tools available to help the economy". He says: "Infrastructure spending is ongoing."
In addition, he forecast further interest rate cuts of up to 3 percentage points from the time of the interview to the end of the year; already, rates have been cut by 1 percentage point. "As interest rates are so low in the developed economies, they don't have this card to play."
But he warns that the forecast rate cuts "are not likely to stimulate the economy in the short term as people will probably use these additional funds to reduce debt".
Brown praises the government for pursuing sound macroeconomic policies, saying: "It did not allow interest rates to fall to the same levels as in the US.
"One of the key structural issues in our economy has been consistently positive real interest rates.
"In contrast, in the US, you've had a number of years of negative real interest rates in a row. George Soros had an apt way of describing what happened: 'When money is free, a rational person will keep on borrowing until there is nothing left.' Maybe this is what happened."
Brown is thoughtful and insightful. It is clear that he has made a study of the crisis. He strikes one as exceedingly down to earth for someone in his position. He is also generous about his competitors.
Etienne Swanepoel is a partner at Webber Wentzel. The opinions expressed are his own
|
|
