As happens when you’re in this field for long enough, it’s been my privilege to watch Mike Brown develop from Nedbank’s eager new financial director to the confident, assured and very competent CEO of the smallest of the country’s Big Banks. In his four years in charge Brown has delivered earnings growth superior to that of his peers, and today announced another 15% increase in the year to end December. Early this afternoon he came across to the Biznews.com studio to provide the latest progress report, talk about Nedbank’s relationship with Old Mutual, his own future, and how the group has positioned itself for a rising interest rate cycle. – AH
ALEC HOGG: Mike Brown, Chief Executive of Nedbank is with us in the studio on the day that the financial results for the year to end, December released. Mike, the market liked them – the share price is up strongly this morning.
MIKE BROWN: Yes, I suppose we don’t always get too excited about what happens to the share price on a particular day, but I do think that we had a solid set of numbers. Earnings at the half year were up 13%, so for the full year we are up 16% – so better performance in the second half than the first half. Strong capital levels, high levels of provisioning and strong surplus liquidity, so I think those are all the sorts of things that markets like in volatile times.
ALEC HOGG: And investors also like the 19% increase in your dividend.
MIKE BROWN: That’s good yes. That is good news and that comes off the back of our very strong capital levels. We have a target for something called common equity Tier 1, which is another confusing banking terminology, but it is our regulatory capital of somewhere between 10.5% and 12.5% and right now we are right at the top of that 12.5%. So our capital is at the top end – the strongest part of our cycle – and that has enabled us to say to the market ‘what we intend to do is slowly drop our dividend cover down towards about two times, which is the centre of our range’. That enables us to grow dividends slightly faster than we are growing earnings.
ALEC HOGG: It is a lovely story – Nedbank’s – particularly since Tom Boardman, your predecessor, took over, your old colleague in fact from the BOE days. And then you have kicked on strongly. Is it likely that you are at a stage now that you’re now thinking ‘well, maybe the fast growth is behind us’?
MIKE BROWN: Yes certainly, if you look at our outlook statement I think that generally, the macroeconomic environment, which is such a key driver of a bank’s results, is likely to remain tough and volatile. The consumer in particular, is under pressure. If interest rates do rise – and forward rate markets are pencilling in as much as a 150 basis points of rises this year – then I think we are going to see quite a lot of pressure on the consumer front. If that does happen then our growth rate will slow from the 16% we saw in 2013.
ALEC HOGG: What a lot of shareholders and in fact outside observers do not understand, is that within a bank, although it is like a huge big oil tanker, you can position yourself for things like an interest rate rise. How have you done this time around?
MIKE BROWN: That is right. Banks would interpret their interest risk positioning as generally an expression of how much money do you make or lose for a one percent parallel shift in the yield curve and generally what that money has made or lost by, is the bank’s own shareholders’ funds. Which is if interest rates are five percent, you are only earning five percent on your own money, but if interest rates go up, you earn more on your own shareholders’ funds. Right now, we’re positioned that for a one percent parallel shift in rates over a twelve-month period, we would make an extra R936m off pre-tax net interest income. We would clearly need some of that to pay for the higher bad debts that would inevitably happen in a higher interest rate environment.
ALEC HOGG: But you’re well positioned then for a rising rate cycle. It is interesting that after the last increase, (Finance Minister) Pravin Gordhan and (SARB Governor) Gill Marcus said don’t not take this fact that the cycle has turned. But the market is suggesting to us that it has.
MIKE BROWN: Yes, the market as I said is pricing in 150 basis points. Our own house view is that we will only get another 50 basis point rise in March and that the market has in fact overreacted. That is because we know GDP growth rates are still very low and rising rates in a low growth environment might push growth even lower, and consumers are under stress. We therefore do think that the market has overreacted as well.
ALEC HOGG: What about lending…do you have a dictat throughout Nedbank that you do not lend too much into this more difficult environment?
MIKE BROWN: One of the key strategies that we talk to shareholders about is something called portfolio tilt. In our minds, that is how we allocate capital and liquidity, but it is also being much more deliberate about what asset categories to grow at what point in the cycle. You would see us during 2013 having shrunk our personal loans book by about ten percent and we think that as all the credit suppliers pull back together in personal loans, it is still going to be a very difficult environment into the future. We have probably given up more market share than our peers in personal loans. We have also been quite selective in our home loan origination where we’ve shrunk that book around two percent. We remember well that when the last interest rate cycle happened, Nedbank had just prior to that, grown market share in home loans. It proved to be an expensive mistake, because generally speaking in an upward rising rate environment your most recently originated home loans have the highest volatility around bad debts. We therefore wanted to protect against that with an outlook that rates are likely to rise.
ALEC HOGG: Do your people understand that? Within in a branch network, they want to lend more money. They want to grow that part of the business.
MIKE BROWN: I think people do understand it. We remain open for business but all we have done is been much more selective around wanting to do home loans for our existing customers. For example, customers who come to us through Nedbank Wealth, Nedbank Business Banking, those sort of referrals – and really trying to cut back on customers who come to us through mortgage originators who effectively would only come to you if you have a cheaper rate than anybody else in the market. You have no long-term relationship with those customers.
@alechogg You sure he trumps FirstRand CEO? I have sneaky suspicion you are going to have to send Sizwe an apology 🙂
— Tommy Nel (@tommynelpta) February 25, 2014
ALEC HOGG: No more fighting on price as it were… It is interesting the point that you make on the different parts of Nedbank and clearly Big Data is giving organisations like yours the ability to get to know your customers better and perhaps to cross-sell. Has there been much improvement on that side?
MIKE BROWN: Yes certainly, we still have a long way to go in being able to understand and interpret our data better. But there are some fantastic initiatives around using our data for the benefit of our customers. So for example, using the data that we can get from our merchant acquiring devices – those devices that you see when you swipe your cards – to enable our customers to know more about their customers. Who is spending money in their shops, what income-levels, and where do those people live? Certainly, if we looked across the whole of Nedbank, for the last four years in a row, we’ve shifted our cross-sell ratios marginally up every year.
ALEC HOGG: What keeps you awake at night?
MIKE BROWN: I think…certainly, it would be the overall macroeconomic environment at the moment. You know markets are looking much more favourably towards developed markets than emerging markets, particularly emerging markets running twin deficits. So we have a higher risk right now of a big blow out in the Rand and an interest rate spike off the back of that. That is clearly not our central case of what is going to happen but I think, you know, you could have a 2002/2003 environment. That would worry us a lot and then I think just generally of the health of the consumer at the moment; the consumer is under stress, particularly consumers at the bottom end. We can see that if you look into the recent results of many of the retailers.
ALEC HOGG: That is a broader picture, but when one looks at the new world that’s emerging, Facebook moving into financial services, the Naspers associate Tencent doing the same thing. Is that not something that might also be worrying you? That banks as we know them at the moment will be very different perhaps in 10 years’ time?
MIKE BROWN: Yes, I certainly think that what we are likely to see is a lot of disintermediation, particularly in the payment base. If you look at all those players coming into this market, I mean generally most of them are avoiding the loans and deposit business, with the enormous amount of regulation around that. However, we are certainly very focused on building our own mobile banking products and the Nedbank App Suite has done particularly well for us as well as disintermediation in the payment space, where there is less regulation.
ALEC HOGG: So there are actually opportunities there. You have the clients. It’s almost like ‘well come and get them from us’.
MIKE BROWN: Yes, I think that is exactly right. We do have the clients. What is our obligation is to elevate and provide those customers with the products that they need to enable them to make their banking lives simpler, which is really what other people are doing and they have to come and get the customers from us.
ALEC HOGG: Mike, since you took over at Nedbank, you’ve really kept your head down. You’ve done everything right, you haven’t been flashy, but my goodness, the bottom line returns have been good. I did an analysis not long ago which shows that you are outperforming all the other (banking) CEO’s. Is that something that you consciously looked at?
MIKE BROWN: No Alec, I mean I certainly, I wouldn’t do that, and for me it’s really all about the team at Nedbank and not me personally.
ALEC HOGG: But it’s almost like a reflection of maybe your own personality. You’re not “out there”. You’re not making speeches every second day. Has that gone through to your leadership style?
MIKE BROWN: Yes, I think certainly for me, I am very focused on running and managing the bank. That is my primary job and responsibility and that is what shareholders pay me to do. So I would like to spend as much of my time running and managing the bank and as little of my time making public speeches as possible.
ALEC HOGG: How old are you now?
MIKE BROWN: I am turning 48 this year.
ALEC HOGG: How much longer do you envisage that you will still be running the bank?
MIKE BROWN: You know that is always a difficult question to ask, because I’m sure there is no sort of normal tenure for a Chief Executive. I will be starting my fifth year now as the CEO. I suppose conventional wisdom would say that by the time you get to ten years, you’re probably getting towards the end, so I guess somewhere between now and five years’ time.
ALEC HOGG: But there are no issues of you wanting to go and find something, some other challenge at this point?
MIKE BROWN: No, I certainly thoroughly enjoy the job that I do. I think to have the role that I have, I work with great people so I am enjoying myself.
ALEC HOGG: What about the relationship with Old Mutual? There was a time not long ago when the supposedly smart analysts were saying Old Mutual needed to sell Nedbank. We know Standard Chartered and others were sniffing around. What is the relationship like now?
MIKE BROWN: We have a very good relationship with Old Mutual and we’re a very strong and important part of their business. You may remember that when Old Mutual was looking to sell its stake in Nedbank, they really had a number of financial challenges driven out of some of their businesses in the US. Subsequent to that, Old Mutual actually sold their Skandia businesses in Europe for just over two billion pounds so certainly, Old Mutual as an entity is in a very strong financial position now, is looking to continue to grow its businesses in Africa, and clearly, Nedbank is an important part of an African growth story.
ALEC HOGG: It makes sense as a long-term holding?
MIKE BROWN: That is right.
ALEC HOGG: Mike Brown is the Chief Executive of Nedbank.
