factors also support this conclusion:
the quality of its management
team, the prudent provisioning of
its debtors’ book, as well as the
strength of its capital base.
STRONG MANAGEMENT
TEAM
In a highly leveraged institution
such as a bank, any small
operational mistake is amplified
and can result in meaningful losses
and erosion of capital.
The quality of management is
therefore a key differentiator
in banking over the long term.
Nedbank achieved its impressive
operational turnaround under the
stewardship of Tom Boardman
from 2004 to 2010, followed by
Mike Brown from 2010 to date.
Importantly, Brown was chief
financial officer under Boardman
and intimately involved over the
entire period. In addition, when
there have been any key staff
departures in its divisions, Nedbank
was able to replace candidates
with internal appointments,
thereby demonstrating depth and
ensuring a retention of institutional
memory – a critical ingredient in
banking. A long-term track record
is the product of a strong team
consistently applying innovative
and judicious business practices
over the long run. As investors,
we believe good management
teams create lasting value for
shareholders, something to which
we are prepared to attach a higher
rating when valuing businesses.
Figure 3
12
ISSUE 6 – SEPTEMBER 2015
PRUDENT PROVISIONING
Provisioning for doubtful debt is
an area of judgement exercised by
a bank’s management team. While
each bank will run complex models
to determine the appropriate level
of specific provisions (provisions
covering loans with evidence
of impairment), it is still left to
management to review these and
apply discretion as to whether
or not the current operating
environment warrants higher
Since then, Nedbank has built up
a level of general provisions that
is now in line with the average
of its peers. The operating
environment for banks in South
Africa remains challenging, as the
effects of Eskom’s load shedding
on small businesses and rising
interest rates on consumers will
still play out. All this may well
present a challenge to the lending
books of banks. Approaching
this uncertain environment with
Figure 4
levels of prudence via additional
overlays or general provisions. In
the aftermath of its recapitalisation
in 2014, Nedbank had the lowest
level of general provisions as a
percentage of its advances book
– only 45% relative to its peers, as
shown in the following chart.
a conservative lending book will
stand Nedbank in good stead and is
yet another example of a well-run
franchise deserving of a narrower
discount rating.
(See: Figure 3)
Since Nedbank’s recapitalisation in
2004, regulations relating to capital
have been tightened significantly
in response to the shortcomings
exposed by the global financial
crisis of 2008. Basel III regulations
have been promulgated and these
have raised both the quality and
the quantity of capital required
from banks globally. While many
banks outside SA are still building
capital to comply with these rules,
Nedbank already holds more
core equity capital today than it
will be required to hold under
the new Basel III rules. Given this
strong capital base, Nedbank is
not constrained when it comes
to driving loan growth organically
or taking advantage of any valueaccretive acquisitions it may want
to pursue. In addition, from an
investor’s perspective, a higher
capital base offers more margin
STRONG CAPITAL POSITION