Wednesday, November 30, 2022

In-depth with Mike Brown, SA’s longest serving bank CEO: Nedbank, digital revolution, renewables, fintechs, greylisting and crypto

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In this in-depth podcast, Nedbank CEO Mike Brown tries (unsuccessfully) to hide his irritation at the slow pace of SA’s economic reform, but brightens up over the demand that’s building for renewable energy investments. The country’s longest-serving banking boss occupies a unique vantage point from which to share his insights on a variety of subjects – ranging from Nedbank’s recent interim results, including the 5% staff reduction and the R10bn investment into digitisation; through to the danger of SA’s potential greylisting and urgent need to regulate crypto currencies. He spoke to Alec Hogg of BizNews.

Nedbank CEO Mike Brown on where the country is economically

I think first and foremost, we always start with the extraordinary challenge that the electricity supply has posed to our economy, and it’s effectively a binding constraint on growth and really doesn’t matter what happens elsewhere. It seems very hard for us to sustainably grow this economy by more than around 2% until we connect materially more electricity supply into the grid, and then underneath that you get some ebbs and flows. Certainly the first quarter felt as if we were starting to get some momentum back behind economic growth. We saw good terms of trade in favour of South Africa. In other words, our export and commodity prices continue to drive economic growth. Broadly speaking, global economic growth was still looking okay. And then as we got to the end of the first quarter and into the second quarter, we had Russia’s invasion of the Ukraine. And we all know what that did to, you know, confidence, economic outlook, food and fuel prices. And we certainly think that the South African economy, having grown quite nicely in the first quarter, 1.9% Q-on-Q, is likely to shrink around about 1.2% Q-on-Q in Q2 as a consequence of the Russian invasion of Ukraine. But also closer to home, we had the floods in KwaZulu-Natal and then, you know, probably grew around about 2% over the full year, which is that cap as a consequence of electricity.  

On whether the President’s announcement on liberalising the supply of electricity is going to affect the economy

I would say that announcement was just kind of three years too late. Okay. But that’s water under the bridge, to understand where we are now. And absolutely, if we are able to deliver on that announcement, we’ve been a country that’s been really, really good at announcements and plans and not so good at actually translating any of those to any kind of real electricity connected to the grid and supply. But if we’re able to deliver on that announcement, I mean, certainly we’re of the belief that what the energy transition will unlock is materially game- changing for the economic outlook of our country. 

On the staff reduction and how it occurred

It’s a huge responsibility as a CEO having a business with 26,000 staff and 8 million customers. But what are we seeing? It’s a trend we’ve seen for a number of years. This isn’t a sudden reduction of staff and the overall staff headcount has slowly been attracting down. And effectively what’s underneath that is what you’ve seen play out in sort of global banks everywhere. It’s digitisation and what Covid has done. As we are interviewing each other now, it’s accelerated digitisation. So as more and more of our clients engage with us digitally, we need less and less of a physical footprint. And we try to manage that workflow. As more and more people engage with us digitally, our own processes in the bank have less paper and reconciliations because that digital engagement is largely straight through processing. So what you’ve seen us do over time is, we don’t want any large scale retrenchment programmes. I mean, that’s certainly not what we think is appropriate either for our brand or our country. But we’ve deliberately tried to manage natural attrition and attract what we think is the need for a much smaller headcount going forward as our business becomes more digital end to end. 

On the concerns around greylisting

I’m going to start with a little bit of an analogy around how anti-money laundering works. I think it’s helpful to try and explain it as a kind of a relay race. First and foremost, there’s a whole bunch of rules and regulations around who can run in the race, and how does that sort of ecosystem work? And then what you have is the first runner. And broadly at the moment, the first runners are the financial services sector. It’s our job to onboard customers, know those customers’ risk, and write to them. And then to the extent that we see transactions that are either suspicious or above certain cash levels, we report those to the second runner, which is the financial institutions. And it’s their job then to take all of those reports, analyse them and what we call join the dots. If we see a suspicious transaction at Nedbank, where did it come from? Has that other bank reported it the other side? And the second runner doing that analysis, their job is then, if they see something that looks suspicious, to say it’s really suspicious, this is a real problem. They hand it over to the third runner, which is the investigating authorities, and they put together a case; and you hand it over to the final runner, which is the judiciary. You know, how do we actually put somebody in jail for that? So you’ve got to think across this broad spectrum.  

Right now in South Africa, you know, there’s always things that I think we can do better as banks. I mean Nedbank was fined the other day because we didn’t report everything on time that we should have. But, the real problem in our system lives with the third and fourth runners, the investigating and prosecuting authorities, which we know under state capture were deliberately debilitated. And so the hardest part to avoid a great greylisting is: can those two lost runners be fixed? I think we can do enough on the front end that the omnibus bill that’s going through parliament really deals with. How many runners do you have in the first race? You know, let’s add in estate agents, let’s add in crypto providers, etc.. The banks, I’m sure we can always do slightly better. But the real challenges are with the third and fourth runners and I hope we can do enough, you know, by January in that space. I mean, I think having the Guptas in jail in Dubai is probably a good start at least, but it is really a huge reputational issue to be grey listed. I personally don’t think it is as bad as a sovereign ratings downgrade below investment grade, but it’s been compared to that. But I do think it will materially increase costs, levels of compliance. And, you know, your country just doesn’t look good globally. And so it is absolutely something we want to avoid.  

On how crypto is affecting the banking sector

Personally, I’m not a big fan. I think a lot of people are going to lose a lot of money with many, many operators who are not as legitimate as they tell people they are. I’m sure there are some that are honest in that world, but all I can say is the sooner that regulators bring crypto into some sort of regulatory net the better, because then people can use it for the convenience that it says it offers, not the more nefarious means that I think, unfortunately, many people are currently using it for.  

Read also:

  • ‘Economic damage is greater than first thought’ – Nedbank CEO Mike Brown
  • SA on the cusp of a revolution in the energy space – Nedbank CIB’s Mike Peo
  • Nedbank reports strong earnings growth, lifts interim dividend

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