LONDON — For the second successive year, South African banks have been rated the very best in the world in the annual Global Bank Quality Benchmark compiled by the Lafferty Group. The analysis, which assesses factors like management and strategy alongside the normal balance sheet data, rates Capitec the only five star bank on earth, with Absa one of only seven to get four stars. SA’s other three major banks, FirstRand, Standard and Nedbank, are all at four stars, giving them the highest average of any country. In this fascinating interview, the banking research specialist’s founder and chairman Michael Lafferty unpacks the reasons why South African banks rate so highly. – Alec Hogg
Well, it’s a warm welcome to Michael Lafferty, whose Lafferty Group released the Global Bank Quality Benchmarking Survey. It’s quite a mouthful, Michael. What does it actually look at?
It’s good to be talking to you again. It looks at the long-term sustainable value or if you like, the quality. Quality (for us) means the long-term sustainability of the bank. By that, we mean its ability to sustain itself to one economy cycle – to a business cycle.
Now, you looked at 100 major banks in 32 countries, including five in South Africa. Last year, Capitec came out really well in the survey. How did it shape this time around?
Absolutely amazing. Capitec is, once again, the only bank in the world to whom we have given a five-star rating. Capitec scored extraordinarily highly as it did last time around as well – absolutely amazing. It’s an extraordinary bank. I think one can only congratulate the management (Gerrie Fourie and his predecessors) who built it up.
That’s extraordinary. Michael, how come it got a five-star rating? As you say, the only bank in the world.
Let me take a step back. We are not the only people who are saying this/taking this view about Capitec. First and foremost, the investors think it’s a fantastic bank. It’s trading under a remarkably high price-to-book book value (if I remember rightly, the last time I looked at it) of round about five. One of the strange and fascinating things we found with this work is that there is a correlation between our star ratings and the price-to-book values of the banks. Maybe you’d then say to me as you said in the beginning, “What is it about Capitec that makes it special?” It’s focused. That’s the first thing. It’s clearly run to a high ethical and business standard, I would say. It has the concept of the one product, which is the essence of its relationship with its customers. It’s a really remarkable businesses and there are organisations/banks a little bit like it. Famously, there was a bank in Germany, back in 1960/70/80/90s, called KKB (Kundenkreditbank) and that was eventually sold to CitiBank. That bank has a remarkable similarity to Capitec but as far as I know, the guys at Capitec never encountered it.
What about Metro Bank in the UK? Gerrie Fourie did say (to me) that the reason why they’re not moving into the UK market is because Metro’s already there.
He’s pulling your leg. I think Gerrie probably does want to move into the UK and if he did, he’d be incredibly successful. Metro Bank is Vernon Hill’s bank. It seems to be doing reasonably well but it’s nothing like the spectacular success of Capitec. It’s modelled on a US bank that Vernon Hill had in the US some years ago. I think it’s making progress but it’s a shadow really, of Capitec.
So, Michael, if you were advising the people at Capitec, you (from what you’re saying now) would propose that they take this model elsewhere.
Yes, actually, I would. I think they’re a remarkable bunch of people with remarkable leadership. Actually, I have to say that is the case with a lot of South African banks that I know and have experienced over the years. I think they’re in a different category. They’re more determined. They expect more from themselves, etcetera. Of course, this bank is only about 20 years old. They were able to create it from scratch, in a very focused way and yes, I think it could be taken to many other countries – not least, to Europe where the consumers are fed up with every bank in the British High Street, for example.
So, Capitec’s a five star. How did the other Big Five South African banks rate?
Well coming along in second position, we have Absa. We still call it Barclays Africa and indeed, the other three banks are roughly in the same position as they were last year. When you look at the five together, the South Africans have a higher average score than the banks in any other country in the world.
So you rate them the highest in the world.
In the world, yes. That’s it. It is the case. We can’t argue with the figures. By the way, here; it’s important that I emphasise this, that we’re not just looking at the financials and ratios etcetera. We’re also looking at future-focused stuff like the strategy of the bank, the culture of the bank, whether the bank measures customer satisfaction, management experience, management qualifications and whether they’re living the brand – all of these sorts of things. The remarkable thing Alec, is that all of this, you can determine from the annual reports of the bank.
What about the Credit Rating agencies, though? They have downgraded South African banks after the Sovereign’s paper became junk.
Firstly, what we are doing has nothing to do with credit ratings. The Credit Ratings agencies live in a different world. They’ve had their challenges as you and I know, over the last 20 years with some of their practises. Back to South Africa though, the Sovereign has been downgraded but we cannot really see a direct correlation between the rating of the Sovereign and the rating of the bank. In fact, as you may have seen: if you look at British banks that fail and European banks that are in crisis; all of them had state guarantees behind them but they still failed.
It was interesting, in the latest Moody’s Credit Rating that they did say, that part of the reason why South Africa’s domestic bonds are still investment grade is because of the strengths of the banks. So, they would be looking at the banks (perhaps) in a different way to the Sovereign and yet, still downgrading them. It doesn’t seem to make a whole lot of sense, Michael. Can you help us?
No, I can’t. In a way, they’re admitting that there’s something special about the South African banks and of course, a bank like Barclays is much more than… Well, South Africa is, by far, its biggest market. It has some very interesting businesses in other parts of Africa as well. By the way, let’s actually take this to another dimension, Alec. Would you believe that (let me just remind myself) of the eight banks that get a four or five-star rating, all but two of them are in emerging markets. The only two that are in developed markets: one of them is in the United States and one of them is in Sweden so there is something special about emerging markets as well.
So, six of the eight that are four or five-star banks in the world, are in emerging markets. The best of them all, is Capitec from South Africa. Was Absa the other one that was in that very elite group?
It’s a four-star bank, yes.
That’s quite a performance. Michael, what is going on then, in the Western world? The ratings of those banks have been under pressure for a while. It would seem that the way you’re interpreting the annual reports and the balance sheets, that it’s justified.
Would you believe that of the 100 banks, roughly 50% in the study score 40% or less of the available marks in this benchmarking. Think about that. Half of the big banks are really, in a pretty poor way and that really, reflects the crisis that they haven’t recovered from. That crisis is particularly obvious in Europe but it’s frankly, also obvious in the United States. We tend to fool ourselves that the American banks are fully recovered and doing tremendously well. The evidence says that is not the case. With quite a few American banks, we’ve lowered their ratings, for example. Overall, if I remember rightly (and I’m just looking to my colleague Patrick here to make sure I’ve got this right), we have only seven banks that have upped their ratings – where their ratings have gone up to a higher star level, but there are 23 that have gone down. That’s telling you that things are not getting better. European banking is in a pretty bad way and American banking is not in as good a position as you might think.
You know balance sheets – probably better than anyone else in the world. When you look at this big survey, are there any banking stocks that are standing out for you as being undervalued and by the same token, overvalued?
No, Alec. You’re taking me into the enemy territory. We are UK regulated and are not permitted to express any investment-type opinions etcetera, so forgive me for not chomping at that bit. Let me see if I can help you in another way. Remember what I said about the correlation between price-book value and our star ratings. That correlation is quite strong. There was one bank last year that had a very high price-book ratio but actually, we only gave it a two-star rating. That was Wells Fargo. We got a lot of negative comments and criticisms for giving it two stars but of course, it turned out later that Wells Fargo had gotten itself into a great deal of trouble. You’re probably familiar with what I’m talking about.
The mis-selling on a grand scale and the opening of state accounts, etcetera. The funniest thing is that all of these signals were there in the annual report of Wells Fargo and its predecessor (going back more than 20 years). You just have to be able to look out and recognise the signals when they hit you in the face.
The Wells Fargo Chief Executive also lost his job over that scandal. Michael, I guess the story then for us, is to have a look at the price-to-books of those 100 banks, have a look at your ratings, and see if there’s anything that stands out. Do our own homework and draw our own conclusions.
To do that you, you have to of course, become a Lafferty client.
From a South African perspective, the banks in South Africa have really done well and another bit of support for the view that they are a very strong part of the economy.
The interesting thing is that I think it’s not just the South African banks, although they are remarkable institutions. I think the insurance sector and right across the big corporate sectors, it seems to me that there is something special about the calibre of South African management. There’s a thought for you.
It’s a good thought Michael, and always good to talk with you. Thank you for your contribution today and even more so, because you’ve got some good news for South Africa.
I’m a big fan of South Africa. I think it’s a fantastic place and as you probably know, I often visit.
Michael Lafferty is the Chairman of the Lafferty Group.
Capitec Bank media statement:
South Africa’s Capitec Bank has been rated the best bank in the world for the second successive year in the Lafferty Group’sGlobal Bank Quality Benchmark. Providing an independent star-rating of the world’s 100 largest quoted banks across 32 countries, the announcement comes despite South Africa’s downgraded credit rating.
Capitec Bank CEO Gerrie Fourie says the bank is proud and thankful to receive the rating, which confirms it’s on the right track to build the best retail bank in the world. “We value this recognition because it’s based on information available in the public domain and represents an objective view of our company, while validating the trust that our clients put in the Capitec Brand. The management team thank our employees for their diligent pursuit to offer our clients simple, affordable and transparent banking that helps them manage their money better. For us, this is just the start of the journey.”
The Lafferty Group’s ratings are based on based on information available in the public domain such as each bank’s business model, assessed in terms of factors like strategy, culture and management. Capitec Bank is the only bank in the world to achieve five stars – beating other global leaders such as HSBC, Goldman Sachs and JPMorgan Chase and local contenders Standard Bank, Absa, Nedbank and FirstRand.
Collectively, SA’s major banks have the highest average of any country. Founder and Chairman Michael Lafferty puts this down to the exceptional calibre of South African management, which allows banks to surpass the global standard. “The world’s best banks are not the giant universal banks or those banks that try to mimic them, but those that are focused – taking a longer-term view that is in the best interests of their customers.”
Lafferty, in conversation with Alec Hogg, said Capitec is an extraordinary bank. “Capitec is focused. That’s the first thing. It’s clearly run to a high ethical and business standard. It has the concept of one product, which is the essence of its relationship with its customers.”
Michael Lafferty founded the Lafferty Group in 1981 in order to provide thought leadership, education and advisory services to the banking and financial services sects, across 150 countries. The Lafferty group’s ratings provide an independent global measure of bank quality.