A hidden secret behind Nedbank Retail’s sensational turnaround – to hell with mortgage originators!
Nedbank CEO Mike Brown has done a fabulous job since he inherited the position from long-time BOE colleague Tom Boardman. The compounded HEPS growth under his watch has surpassed that of his peers who moved into the hot seats at competitors around the same time. One of the reasons has been the sensational turnaround at the bank's Retail Division led by Ingrid Johnson. In this
insightful interview, Johnson takes us through her strategy, one which often swam against conventional wisdom. Including the brave decision to completely dispense with mortgage originators. – AH
GUGULETHU MFUPHI: Nedbank has made significant progress in transforming its Retail business into a client-centred and aspirational bank for all since the start of its fundamental repositioning in 2010. Ingrid Johnson, Group Managing Executive of Retail & Business Banking joins us now for more. Ingrid, firstly take us back a few steps before we understand the changes that you've made. Take us back to 2010 and the reasons behind the turnaround in the image of the bank.
INGRID JOHNSON: Good afternoon and it really was quite a challenging time if you think of the global financial credit crisis and the turn in '08. South Africa had the challenges and when you then look at our Retail business – as Nedbank, we've always been challenged in Retail. We've had stronger Wholesale businesses, but in our Retail business we've had stops and starts, divergence strategies, and probably in the 90's, did some serious damage in terms of perceptions where we forcibly moved clients and decided their worth. We chose: you go either to People's Bank or to Nedbank and that was immensely damaging, so we were really positioned as a bank for the more affluent and elitist. When the issues happened in 2009, we never had sufficient transactional banking earnings to actually protect us as a buffer for the elevated credit losses. We also had issues in the risk environment where we got our risk materially wrong and unfortunately, what you grant today, you actually only get to experience in three to four years' time so that was devastating and we had a loss in 2009 of 27 million rand. It was an opportunity to step back – I was newly appointed in October 2009 – and take the opportunity to say 'so now, what do we do?' I had the privilege of turning my back to the organisation and creating an ideal future of what we'd like to be and what the differentiators are. In addition, very importantly, how do you compete in a competitive market when Nedbank wasn't even in the game? How do you shift perception? What is your positioning, and how are you differentiated? Then the choices and the strategic intent followed, and so we actually crafted a very detailed turnaround plan that we've been executing on, for four years.
ALEC HOGG: Who did you target? Who were the weak spots amongst the competitors?
INGRID JOHNSON: We had formidable competitors, and what we had to do was say 'how do we compete in the one area where the competitors hadn't necessarily taken ownership?' Where Nedbank is strong, particularly in the Wholesale environment was around being very client-centred, and delivering a distinctive client-centred banking experience and that you would choose. If you go into a store, we don't say you can't have the Levi jeans, you can only have True Religion or vice versa. You choose, and so where we've positioned ourselves is that the client has aspirations and financial goals and how we position ourselves, is so that when you walk in-store, online, or in the contact centre, we are available to give you whatever you would like to choose and actually partner with you through your lifecycle.
GUGULETHU MFUPHI: One of the influencing factors that contributed to that loss back in 2009 – if I'm not mistaken – was the issue around mortgage originators. In your statement today, you mentioned that you implemented Right Risk Management Discipline. What is that and how does it work?
INGRID JOHNSON: This was a fundamental change to our entire business of home loans. If you look at the industry at the time, it was very strongly fuelled by mortgage originators that then gave all the banks a choice of applicants, so there was a lot of froth but not necessarily always of good quality. It was high risk. You're paying for the privilege, so you've taken a product that was high risk with a lot of down side as the cycle turns, and you've translated it to a commodity. We were therefore all competing on the same dimensions of turnaround and price, so what we had to do was step out of that and say 'it's actually not about market share. It's about quality, and it's about building a transactional relationship with your client through their lifecycle'. Your home loans are important, so they're not a lever to attract the transactional banking relationship, but if you don't do the home loan, you will lose the transactional banking relationship. What we then did again – and it was courageous because it was at odds with how the industry was operating at the time. In fact, Nedbank had chosen not to deal with originators in the early 2000's. The problem then was that we never had a compelling alternative, so what we looked at were two very important things: (1) 'What is our compelling alternative for clients?' so that when they actually have a home loan, they know where to come to and we make it transparent and easily accessible. We have an online channel now that we have ten percent of our intake through and we'll turn around the answer within hours. The average turnaround time is eight days – we are eight hours.
ALEC HOGG: What percentage is the average approval rate?
INGRID JOHNSON: It's quite low – you're sort of below 20 percent.
ALEC HOGG: I'm sorry, but we're running out of time. With the mortgage originators: how much were they charging you?
INGRID JOHNSON: A peak of two point something percent and it dropped to four percent, which was still too expensive.
ALEC HOGG: So you decided that you're not going to deal with these people anymore. Clearly, you lost all of their business.
INGRID JOHNSON: Well, we do some for our own Nedbank customers and it's transparent now. Clients pay for the privilege of using an originator.
ALEC HOGG: How quick has that turnaround been in being able to build up a sufficient volume of applications?
INGRID JOHNSON: The other opportunity, which was under-tapped, was the strong Wholesale relations we have with clients as well as the businesses, the households, the key individuals, and the employees. We've unleashed our banking business clients to do more of their home loans, as well as them having a compelling alternative to clients that we advertise. We actually tell them about things that banks don't tell them about, for example, the best place to save is to put your money into a surplus home loan. The other key imperative about turning the business around was actually getting our granting strategies correct – whom we lend to – and making sure that we had adequate provisions and addressed the default.
ALEC HOGG: Ingrid, we saw the big disaster at ABSA was on their home loan book. Have you avoided that kind of problem?
INGRID JOHNSON: Totally. We took action in '09. In October of '09, we looked at the models that were driving the coverage ratios and provisioning – totally inadequate. They were backward looking and yet, you're realising your defaulted loan in the next 18 months because you can't hold these loans on your books for an extended period.
ALEC HOGG: You're in good shape now and looking even stronger into the future.
INGRID JOHNSON: We took the pain in '09 and '10.
ALEC HOGG: Are you looking stronger into the future?
INGRID JOHNSON: Undoubtedly
ALEC HOGG: And as far as the Retail side of the Nedbank business, you started off by saying you always had a problem there, which we know. Is the problem over? Is this going to be the jewel in the crown?
INGRID JOHNSON: We hope so. We have worked tirelessly for four years to actually change that client experience and we have two million more clients actually banking with us, than we had four years ago. The level of [inaudible 6:42] is much deeper, and the quality of client that we've gained… We've actually grown, in the last three years – two point eight billion rand of additional revenue for non-interest bearing…
ALEC HOGG: Was that not in unsecured lending?
INGRID JOHNSON: No, actually exclude that. We grew by 12.8 percent and I think the client experience… I have a visual. This is how you used to experience Nedbank. If you wanted something, we'd just pummel you with a lot of paperwork. Now we say 'how can we make your fabulous life happen?' with one simple brochure.
ALEC HOGG: You're a great marketer as well, Ingrid Johnson. Thank you for coming through and telling us a little bit about Nedbank.