Treasurers’ Conference – Banking through a crisis

Mike Brown, Nedbank CEO, talks to us about the challenges of carrying a bank like Nedbank through a crisis of the scale of Covid and how the organisation has adapted to deal with the ongoing consequences.

Before a crisis – understand your industry and your business

The Covid-induced economic crisis and lockdown that hit in March was not anticipated - crises are by nature unpredictable. The only way to deal with a crisis is to be prepared and ensure that the key people in your business, from a management point of view, have experienced many different cycles and know how to deal with them. You need to know in detail how your system performs under stress and if possible, start strong across the system.  With 8 million customers and 30 000 staff, if we couldn’t push the button very quickly on up-to-date and relevant business continuity plans, we would have had a very different outcome.

Banks are highly integrated in the economies where they operate

The macroeconomic hedge fund side of the banking business is tightly correlated to the macroeconomic environment and cycles where you operate. There was a dent in earnings post the GFC, but banks remained profitable. There was a much bigger dent in earnings in 2020. Banks remained profitable, but a large portion of the larger dent in earnings was caused by the revised accounting standards for bad debts, which have to be much more forward looking. As a result, there was an accelerated return to profitability relative to the more gradual return after the GFC where provisions bled through over several years rather than upfront.

Causes may differ, but the sequence of a crisis ‘rhymes’ so follow the playbook

There's a well-worn playbook to follow having seen what happened in previous economic crises. Initially there was enormous volatility in market risk and liquidity. By Q3, stability had largely returned in both the market risk environment and the liquidity environment. In times of crisis, liquidity moves to the big banks, with the stress playing out more in the smaller players and in the asset manager hedge fund environment who may have taken on more gearing than they than they should have. Q2 saw the height of our focus on credit risk involving a huge amount of restructuring of clients’ accounts, deep dives into watch lists and industries that were likely to be most affected and what to with forward looking provisioning in June. The biggest piece of credit risk played out in the Q2 and Q3 environment. Increasing credit risk and so-called ratings migration inevitably leads to increases in risk weighted assets. We had a strong focus on our RWA optimization and started to see RWA increases coming through in Q2 and Q3 last year. By Q4 this had stabilized and there was a strong improvement in capital levels in Q1 this year. The same played out in capital where our biggest dip was in Q2 last year. In Q3/4, capital began to rebuild, albeit slowly, and we saw a stronger rebuild of capital in Q1 this year. The other thing to remain focused on would be idiosyncratic risks that could be specific to a particular bank or to the crisis.

Move quickly

With a crisis, it’s important to move quickly and focus on overreacting than underreacting. We moved very fast at the back end of March and early April. We completely pivoted the strategy of the organization and changed what we saw as the KPIs for the year and our balanced scorecards or reward systems around them. This enabled us to switch to a very strong balance sheet focus and less of an income statement focus. People were focused on how well you managed your capital and liquidity from a balance sheet point of view, so we focused on that. We also had a deep understanding of our role and the role of banks in the crisis. We had to ensure we were not procyclical and contributing more to the crisis by not supporting our clients and customers in their time of need. Our focus became the health and safety of our staff and supporting clients and customers. In Q2/3 last year, we restructured client accounts and helped clients in good standing who had been impacted by Covid. This amounted to more than R120 billion and more than 400 000 clients with our workforce all working from home. We didn't squeeze any of our suppliers, particularly small suppliers, and made sure we paid them all on time.

We had a massive focus on reporting, including daily reporting on key metrics and daily conversations with our dealing room and traders to figure out what they were seeing in the market. We are fortunate that our industries and regulators work well alongside each other. By mid-April, the Banking Association had written to the SARB and National Treasury on the regulatory interventions that would be appropriate in a Covid environment.

Remaining flexible and nimble is vital. We surprised ourselves with our ability to transition to a work from home environment for about 70% of our campus staff. One of the scary things about a crisis is the limited forward visibility, which you must accept. You need to understand a range of scenarios and what the lead indicators are that could take you into each one of them rather than trying to build out a perfect road map of what you think is going to happen in the future.

Stay ahead of the cycle

We're fortunate in the bank to have high frequency data that comes through our point-of-sale devices where we have 25% - 30% market share. These were good indicators as to what was happening in the underlying economy and various sectors of that economy, which helped us to respond through our client facing operations. Next was getting the balance right between operational and daily reporting. If you want the organisation to focus on health, safety and managing liquidity, get that reporting up and running. At the same time, leadership needs to understand what's coming next, namely credit, capital and the RWA and how you’re going to shift the organization into managing the next phase.

Over communicate to all key stakeholders

Communication is vital, both internally and externally. We significantly increased our levels of disclosure around risk management and what the market and investors wanted more detail on.

Look for opportunities

Crises also have opportunities. We saw this crisis as a significant opportunity to build our employer brand as well as our client brand. All clients who had standing liquidity facilities with the bank were able to draw on those. There are also opportunities in market dislocation. We saw this in our results with an extraordinary strong positive performance in our global markets and trading businesses. The lending side of banks is very competitive, so there's not often opportunities to open up some asset pricing but, when yield curves and the cost of capital jumped up as much as it did, it was an opportunity to change asset pricing. You need to be on the lookout for acquisition opportunities. If you are strong in a crisis, you can get a once in a lifetime opportunity. You need to leverage your strengths. We have made significant investments in digital over time and were well down our digital journey by the time this crisis hit. Over most of last year, the only revenue sides of our business that were growing in very high double digits and even over 100% was anything to do with digital.

Emerging from the crisis

We know this too shall pass. At our equity roadshows in August 2020, everybody saw the glass half empty or empty. When people looked at GDP forecasts, they weren't low enough. When people looked at provisioning, did we have enough? etc. In April this year, people looked at our GDP forecasts and thought we weren’t optimistic enough. When they looked at our provisioning, they wondered how quickly these provisions were going to unwind. For most of last year there were GDP downgrades in every forecast. Albeit off a very low base, most GDP forecasts this year are being upgraded, which is positive for sentiment. It’s important not to let any good crisis go to waste and build back stronger. We’ve accelerated the digital journey that we were on and Covid has given our clients a helping hand to accelerate their behavior in this regard too. We’ve also accelerated our movement towards a hybrid workforce. As hard as it is to set targets in a crisis, you do need to draw a line in the sand. When we presented our results, we drew a line in the sand regarding when we expected to get back to pre-crisis levels on key financial metrics. We expect headline earnings and return on equity to return to pre-crisis levels by 2023. You must not lose sight and focus on the importance of your people engagement and their wellbeing, particularly in a health crisis like Covid and to stay close to your clients. Finally, beware the political and regulatory backlash. Most crises produce some form of political and regulatory intervention. There’s always a desire to blame banks for what they did or didn't do. Unlike the GFC, banks were not the cause of this latest crisis and in fact were extremely helpful. Unfortunately, a crisis like this, particularly in South Africa, increases the gap between the haves and the have nots. If you can work from home, are tech savvy and your business has remained open, you’re probably in better condition today than you were pre-crisis because you've had 300 basis points of rate cuts. But if you’re poorly educated and unable to operate in a tech and virtual world, you're even more disadvantaged than before. We've got to build back an economy that can attract higher levels of investment to drive higher levels of growth that will create jobs and ensure that South Africa’s fiscal and financial position can remain appropriate.