CFO Mike Davis unpacks the exciting next steps in Nedbank’s evolution, which includes a unique approach to technology and a partnership with the government that might see South Africa into a better 2024, in a CFO Magazine interview.
In 2014, Nedbank set out on a multibillion-rand digital transformation project to improve its operations and client experience. “The executive team had to decide whether we wanted to roll out a brand-new technology stack end-to-end, continue to replace pieces of technology, or look at retaining and refactoring existing technology,” says CFO Mike Davis. “We chose a combination of them all.”
The group set out to build a modern, modular and agile technology platform using a best-of-breed approach. “We decided there would be pieces of technology we retain, pieces we replace, and pieces we refactor,” he explains.
They coined it: Managed Evolution.
At the time of the group’s 2023 half-year results, managed evolution had reached 93 percent completion, with plans to reach 100 percent by the end of 2024. “We are 99 percent complete with our foundational components having started with the front-end and middleware transformation, and 84 percent complete with our refactoring and/or replacing of our core banking systems” Mike says.
Mike explains that part of the refactoring meant stripping pieces of hard coding out of the existing core banking solution and rather supporting this with foundational component pieces of technology. “This included the likes of pricing and billing, for example, that has been taken out of the core banking solution and now sits in its own module.”
He adds that this approach enables increased levels of real-time straight-through processing, leveraging modular components, becoming more efficient and agile, enabling a quicker launch of new products and innovations to market and improves client experience and much more.
“We are building a world-class technology stack, something differentiating when it comes to banking in South Africa.”
This hybrid approach to technology also allows Nedbank to change pieces of technology over time as technology and the needs of their clients change. “The approach we have adopted allows us to take different pieces of technology and use them as and when we need to. If something better comes along, we can unplug old technology and plug in new technology,” he says.
The rollout of Managed Evolution and digital initiatives have helped the bank increase the number of digitally active clients by 14 percent year-on-year to 2,8 million; main-banked digitally active clients to 69 percent; and digital sales to 56 percent during the first half of 2023. This compares to 1,7 million digitally active clients; 47 percent main-banked digitally active clients; and 12 percent digital sales in 2019.
“As a result, client experience continues to improve, with Nedbank now rated the number one bank in South Africa from a Net Promoter Score perspective,” Mike adds.
The bank is also focused on driving a R2.5 billion cost-saving initiative, which it plans to achieve in early 2024 “through appropriate operating model changes, given higher levels of digital activity and therefore lower footfall in branches”.
“We have an ongoing commitment to effectively manage the expense line with discipline,” he explains. “Whenever you expect topline revenue to slow, you’ve got to focus on expenses.”
He adds that changing the bank’s operating model has resulted in lower branch floor space, lower corporate real estate and a reduction in headcount – in response to lower teller activity.
This has also allowed the company to see more value in its digital platforms.
With the use of technology, Nedbank Money app active clients has reached 2,2 million, transactional volumes on the app increased by 22 percent, and transaction values by 23 percent. Revenue from value-added services grew by 29 percent across prepaid data, voucher and electricity purchases, as well as Lotto and sending money directly to a cellphone.
Since its launch in 2020, the Avo super app (now SuperShop) has signed up 2,3 million customers, with over 23,000 businesses registered to offer their products and services on this e-commerce platform. The app has a 70 percent year-on-year increase in GMV (gross merchandise value).
With the deteriorating macroeconomic environment and increasing geopolitical risks, running a business in South Africa has become a lot more challenging, Mike says. “This has played out in higher levels of interest rates, inflation and loadshedding, which has translated into higher levels of consumer distress, translating into higher impairments (up 57 percent).”
Higher interest rates, however, also result in banks earning higher levels of net interest income (NII) due to higher endowment. This, as well as solid non-interest revenue (NIR) growth of seven percent and strong associate income growth of 53 percent, resulted in good top-line revenue growth of 14 percent.
“Together with well-managed costs [seven percent], this resulted in strong pre-provisioning operating profit growth of 22 percent and a reduction in the cost-to-income ratio to 52.9 percent,” he explains.
The bank’s headline earnings grew by 10 percent and return on equity increased to 14.2 percent.
Mike highlights that the management team remains focused on the delivery of its short-term and medium-term targets, including an ROE of 15 percent in 2023 and 17 percent by 2025.
In July, Nedbank signed a pledge along with 115 of South Africa’s leading corporations to work with government and play its part in helping to address the key economic challenges facing South Africa, with the aim of achieving higher levels of sustainable and inclusive economic growth.
This number has since increased to 130 corporations and keeps rising.
“Society is increasingly demanding that companies make a positive impact, especially in a country like ours, with significant levels of inequality, poverty, unemployment, crime and corruption, and poor education outcomes, to name a few,” Mike says.
So, when the CE Mike Brown brought the pledge to group exco, he had their full support to commit Nedbank to this initiative. “It’s something we feel is a responsible initiative and commitment to make as a large corporate in South Africa,” adds Mike [Davis]
The three key challenges that this initiative looks to address are:
“It’s extremely important that we as corporate SA support government in resolving and improving our electricity capacity, and our transport and logistics infrastructure, but obviously you can’t do any of that if you don’t address crime and corruption at the same time,” Mike explains.
In support of energy certainty, Mike highlights that, “At our interim results in June, our total renewable energy financing across the government Renewable Independent Power Producer Programme (REIPPPP), together with financed commercial private power generation and rooftop solar finance across our frontline businesses was around R28 billion. During this period, we have seen a 300 percent increase in retail solar PV solutions financed and a near doubling of new commercial private power generation mandates.”
“We are particularly excited with Nedbank’s pipeline in commercial private power generation given the increase in mandates up to 1.9 GW, from just less than 1 GW in December 2022. We anticipate clients to start drawing down on these facilities in the second half of this year and into 2024.”
In support of this initiative, through its energy policy, which was designed to redirect investment funds towards cleaner alternatives, Nedbank has aligned its business strategy, policies and incentives with the Paris Agreement.
Mike further emphasises that there is also a growing need for activities to support agriculture, water and sanitation, quality education, as well as sustainable residential and commercial property portfolios, to name a few.
Ensuring good business
Nedbank is focusing on fulfilling its purpose of using the bank’s financial expertise to do good. “We’re seeing increasing demands from all stakeholders who want to be part of a company that makes a positive difference and helps them to contribute to environmental and social causes,” Mike says.
He explains that clients increasingly want to support responsible companies and work with partners that share the same values. Investors are increasingly incorporating ESG in their investment decisions and seeking sustainable returns. Regulators are increasingly expecting companies to comply with various new rules, regulations and frameworks.
“By focusing on ESG, we can build sustainable businesses that are future fit, deliver on our purpose and embed good business practice, as well as be a source of commercial advantage and differentiation,” he adds.
At Nedbank, this is embedded in the way the business is run and how targets are set, and the role of the CFO in this is ever-increasing.
“The role of the CFO is changing, moving away from purely focusing on financial accounting and reporting to more value accounting and reporting, with the core to this being sustainability,” Mike explains.
“This means the CFO will be intricately involved in setting sustainability-related targets, measuring and tracking progress, as well as reporting on it while at the same time ensuring its credibility and integrity,” he adds.
Nedbank focuses on nine of the sustainable development goals (SDGs) to help elevate doing good that it aspires to in its purpose, which is to create a just, equal and prosperous society for the future. “They provide a lens on innovation that can help us meet the needs of our clients by identifying commercial opportunities, new products and services, and growth areas,” Mike says.
This, he adds, sees the bank deliberately use its core business to better environmental and social outcomes. “We have an ambition to support new sustainable development financing of R150 billion by 2025. We also continue to reduce our own carbon emissions, with a target to decrease our greenhouse gas emissions by 40 percent by 2025.”
Some of the bank’s other ESG highlights include a AAA ESG rating by MSCI (top 5 percent of global banks), maintaining a level one B-BBEE status for the past five years, welcoming its fourth intake of 2,800 unemployed youth and high levels of employee satisfaction across its employee complement.
This interview was originally published in the second edition of the 2023 CFO Magazine. Read it here.