Nedcor executives walked off with pay checks worth R109-million in 2002, having presided over the destruction of a quarter of the bank’s capital last year.
Last week the bank announced a staggering R1,6-billion loss, with the finger of blame clearly pointing at the old guard under former CEO Richard Laubscher, who left the bank last year with R37-million in share options and salary, including a R1,6-million payout bonus.
The scale of the losses and the need to restate prior year figures so dramatically suggest things have not been well at Nedcor for several years. Shareholders and analysts will want to know whether these prior year figures are plausible or whether they were massaged higher to enrich the executive strata.
To repair the balance sheet, Nedcor will tap shareholders for an additional R5-billion and 53% parent Old Mutual has agreed to cough up its share of R2,5-billion. The price for this loyalty is steep: a new executive team at Nedcor headed by CEO Tom Boardman; a new chairperson,Warren Clewlow; a brutal spring clean of the balance sheet; far greater transparency in accounting reporting; more vigilant oversight by Old Mutual; and a change in the way executives will be remunerated.
The results show staff costs, post the BoE merger, ballooned by 28% to nearly R5-billion last year. This, say analysts, is where the unkindest cuts must fall, as the bank embarks on an aggressive cost-cutting programme. “They need to implement a high-level cost cutting exercise, which means analysing the costs from top to bottom, and cutting where the bulk of the unnecessary costs lie,” says Leon Claassen, director of ratings agency CA Ratings.
Despite repeated trading updates in recent months, few expected the losses to mount so dramatically and so quickly. Boardman, who headed the ailing BoE before its merger with Nedcor two years ago, took over from Laubscher late last year. At the time, Laubscher suggested new blood should come in, and that CEOs should not hang around too long.
The language was reassuring but it is now clearer why he left when he did. Old Mutual CEO Jim Sutcliffe said this week that he had written to Laubscher in December 2002 demanding greater accounting transparency and improved management information. He denies that Laubscher was fired.
It was an inglorious end to a brilliant career. Variously described as charismatic, decisive and a natural leader, Laubscher appeared to steer Nedcor to the top of the banking log by the late 1990s.
But this is the second time in less than 20 years it has been pulled back from the abyss. It faced a run by nervous depositors in the 1980s, ran up massive foreign currency exposures, and wrote off a R300-million exposure to Louis Luyt’s failed Triomf Fertiliser group.
Old Mutual stepped in to recapitalise the group, lifting its shareholding above 50%. Nedcor clawed its way back from the brink to become the country’s best rated bank by the late 1990s. The formula was cost-cutting, tighter risk management and lending out money at a higher rate than it cost to fund these loans — precisely the message that Boardman was expounding this week.
By the late 1990s things started to unravel. The group acquired a sizeable stake in Dimension Data, another fallen angel, which at one time accounted for nearly a fifth of the bank’s market value. At the height of the dotcom boom Nedcor executives hatched a scheme to reward themselves based on the performance of shares, but public outcry spared them from their own folly as Didata’s share price crashed to earth. Boardman pointed out this week that one does not need to own shares in an IT company to benefit from its technology.
A major turning-point for the group was its failed hostile bid for Standard Bank. Curiously, one of the motivations was the gulf between cost-to-income ratios at Standard and Nedcor, which at the time boasted the lowest ratio of the “Big Four”. The accompanying table shows how things have been turned on their head.
The bid galvanised Standard’s management to do many things for which it was upbraided by Nedcor.
Then came the merger of BoE, caught up in the small banking crisis of two years ago as depositors fled for size. The costs were much higher than anticipated.
Coronation Asset Management banking analyst Neville Chester points out that one motive for the merger was to gain critical mass and reduce BoE’s relatively high cost of funding. The reverse seems to have happened: Nedcor’s funding costs rose to meet that of BoE. Chester believes Nedcor overpaid by 10%, or about R700-million, for BoE, based on the latest goodwill write-offs for BoE.
Behind this lie corporate governance lapses. Nedcor’s 27-member asset-liability committee (Alco) seemed paralysed. How else can one explain the decision to lock in R6-billion in borrowings at fixed rates to pay for BoE, on the presumption that interest rates would not fall?
To fund BoE’s acquisition, Nedcor raised R4-billion in fixed rate notes at 13,15% and a further R2-billion at 11,3%, none of it hedged for interest rate exposure. The group also held a sizeable chunk of capital abroad, leaving it vulnerable to exchange rate movements. These were gambles for which shareholders must now pay.
Alco has since been reduced to eight members, and Boardman is demanding accountability at all levels. Nedcor’s executive committee has also been whittled from 22 members to 17, and several executive directors are making way for independent non-executives on the board.
Questions have also been asked of audit firms KPMG and Deloitte & Touche, and why the accounting skeletons have only now come out of the closet. A Nedcor spokesperson says their retention as auditors suggests the board is not unhappy with their performance.
Claassen says management will have to be decisive in cutting costs, but the hard part will be regaining market share. Over the last year it lost ground in all markets except instalment finance, lifted by its alliance with Imperial Bank.
It’s not all bad news for Nedcor. Many believe the poor results may be exaggerated, a common practice among new CEOs eager to start on a low base. Nedcor could repeat the convalescence of the 1980s.
But reputations have been sullied. Outgoing chairperson Chris Liebenberg commented some years ago that reputations that take years to cultivate can be destroyed overnight. What was he imagining?