Strategic and Emerging Issues in South African …2 Strategic and Emerging Issues in South African...

PwC

Strategic and Emerging Issues inSouth African Banking

2003 Edition

Contents

Foreword 1

Executive summary 3

Market environment 9

Emerging issues 19

Performance 29

Competition and positioning 33

Ongoing issues in banking 41

“Simplify to Succeed” 51

Canadian and Australian perspectives 59

Peer review 63

Appendices 69

• Methodology 71

• Bank groups 72

• Participants 73

• Background comments on participants 74

• December 2002 Quarterly DI 900 Analysis of South African Banks 79

• “Simplify to Succeed” – Priority actions 81

Partners in success – About PricewaterhouseCoopers 87

PricewaterhouseCoopers has taken all reasonable steps to ensure that the information contained herein has been obtained from reliable sources and that this publication is accurate and authoritative in all respects. However, this publication is not intended to give legal, tax, accounting or other professional advice. No reader should act on the basis of any information contained in this publication without considering and, if necessary, taking appropriate advice upon their own particular circumstances. If such advice or other expert assistance is required, the services of a competent professional person should be sought.

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1

Foreword

This is the eighth PricewaterhouseCoopers survey on banking in South Africa. As in the previous three years, we have once again decided to continue our survey “Strate-gic and Emerging Issues in South African Banking” this year. Three previous surveys focused on Foreign Banking and one on Investment and Merchant Banking.

This survey has been developed by PricewaterhouseCoopers and Dr Brian Metcalfe and builds on the previous surveys in a number of areas. New areas covered include:

• The inclusion of a paper entitled “Simplify to Succeed” and the assessment of banks’ progress on ten priority actions in banking mentioned in this paper.

• Industry views of the impact of the demise of the A2 sector.

• Matters that could cause foreign banks to reconsider their presence in South Africa.

The key objectives of this survey remain to:

• Raise awareness of strategic and emer-ging issues in banking in South Africa.

• Establish data on certain industry trends.

• Understand the thinking of Chief Executive Offi cers in the banking industry.

• Provoke timely discussion and debate on the best options for capitalising on trends to enhance and improve performance of the various banks.

• Provide perspectives on how banking in South Africa may evolve over the next three years.

Findings of particular interest in this year’s survey include observations on:

• Foreign banks’ views on regulation.

• Development of a Financial Services Charter.

• Signifi cant increase in competitive intensity in the retail market.

• Return on capital viewed as the most important measure of success.

• Preparation for the implementation of Basel II.

Bankers and other readers have in the past indicated that they have found the material useful and we trust that, with the new areas included in this survey, this remains the case in this industry-wide survey.

I would like to thank the Chief Executive Offi cers and Senior Executives who once again participated in this survey for their time, commitment and support in making this publication possible. I would also like to again thank Brian Metcalfe for his work in producing this report. As in the past, we look forward to feedback on this survey and on topics to be included in future surveys on the South African banking industry.

Tom WinterboerLead Banking Partner PricewaterhouseCoopers Inc.Johannesburg

26 May 2003

Strategic and Emerging Issues in South African Banking 2003


Dr. Brian Metcalfe is an Associate Professor in the Business School at Brock University, Ontario, Canada. He has a doctorate in Bank Marketing and is the author of seven reports on foreign banks in Australia, three reports on foreign banks in Canada and one report on Wealth Management in Canada.

This is the eighth survey of banking in South Africa. The fi rst three surveys focused on the foreign banking sector, the 1999 survey focused on investment and merchant banking, and the last three surveys, like this one, on strategic issues. In 2001 he prepared, on behalf of PricewaterhouseCoopers, “Tokyo, Today and Tomorrow, A survey of foreign banks and securities companies in Japan.”

He has also published a variety of articles on international banking and fi nancial market-place dynamics. He is co-author of “Consumer Bank Marketing”, a textbook published for the Institute of Canadian Bankers’ Fellowship Programme. His university courses include Financial Services Marketing, e Business Strategy, Internet Marketing, International Marketing and International Business. He has been employed by the merchant banking subsidiaries of National Westminster Bank and Bank of Ireland and has worked in the marketing department of Connecticut Bank and Trust Co.

He has consulted for a wide range of organisations, including Royal Bank of Canada, Bank of Nova Scotia, Barclays Bank, Clarica Life Insurance Company, Equitable Life of Canada, and several major consulting fi rms.

In 1999 he taught an executive management course entitled “Financial Services Market-ing” at the Graduate School of Business, University of Cape Town.

This report was researched and written by Brian Metcalfe, Ph.D. Information presented herein, while

obtained from sources believed reliable, is not guaranteed as to accuracy or completeness. This report

has been commissioned by and distributed through PricewaterhouseCoopers Inc., Johannesburg.

Additional copies of this report can be obtained from Tom Winterboer, Lead Banking

Partner: Financial Services Practice – PricewaterhouseCoopers Inc., 2 Eglin Road, Sunninghill, 2157

Telephone: +27 11 797 5407 Fax: +27 11 209 5407 E-mail: [email protected]

©2003 PricewaterhouseCoopers. PricewaterhouseCoopers refers to the individual member fi rms of

the worldwide PricewaterhouseCoopers organisation. All rights reserved.

About the Author

executivesummary

4

This survey focuses on strategic and emerg-ing issues in South African banking.

Participants are a combination of domestic and foreign banks; they range from local niche players to branches of global banks to the Big Four domestic banks.

The survey attempts to synthesise diverse viewpoints, protect confi dentiality and offer insights into the ever changing fi nancial services environment.

It is based on interviews with manag-ing directors and senior executives of 22 banks, 13 of whom are foreign-owned and nine of whom are domestically-owned.

The number of participants this year has been reduced as a result of consolidation in the industry and our own emphasis mainly on the larger foreign banks. Some of the banks included in the previous 2002 report have either been taken over, given up their banking licence or left the market. These include BoE Bank, PSG Investment Bank, African Merchant Bank, Brait Mer-chant Bank and ING Bank NV.

The interviews were approximately one hour in length and were conducted in Johannesburg during February and March 2003.

The domestic participants included ABSA, FirstRand Bank, Gensec Bank, Investec Bank, Mercantile Bank, Nedcor Bank, African Bank, Sasfi n Bank and The Standard Bank of South Africa.

The foreign participants were ABN AMRO Bank NV, Barclays Bank Plc, Citibank NA, Commerzbank AG, Crédit Agricole Indosuez, Deutsche Bank AG, Dresdner Bank AG, HSBC Equator, JP Morgan Chase Bank, RBC Financial, State Bank of India, The South African Bank of Athens and UBS Warburg.

Background


Strategic and Emerging Issues in South African Banking 2003 5

The following fi ndings are based on per-sonal interviews with 22 banks who are judged to represent a sound and compre-hensive overview of the banking industry. The main fi ndings are summarised below:

Most important developmentsDramatic changes over the last year have altered the fi nancial services landscape.

The market is no longer perceived as being overcrowded and there is concern about the high level of market concentration.

The Big Four banks see the development of a Financial Services Charter as a major change. The level of foreign bank participation has been reduced as a result of some banks either downsizing or leaving the market.

Bankers’ criticisms of the fi nancial systemBankers noted their lack of success in dealing with the previously unbanked market.

Participants believe that the A2 sector provided a tangible benefi t to the banking industry. It was felt that the regulators did too little too late and failed this sector.

There is a widespread feeling among the foreign banks that they are becoming over-regulated. They also found endowment capital requirements onerous.

Market competitionMerchant and investment banking representsthe most competitive part of the banking industry. The participants are continually making changes to their strategies.

The retail market has increased in competitive intensity, with 83% of

participants viewing it as intensely competitive. All retail participants have made strategic changes.

Drivers of changeTechnology continues to drive change, while more players now seek economies of scale. New foreign entrants are no longer considered to be effective as a force for change.

Pressing issuesProfi t performance and improving revenue growth are pressing issues for all banks. Two foreign banks anticipate growth rates of 100% or more this year, while three domestic banks anticipate growth of 20% or more.

Return on Capital has replaced Image and Reputation as the most important measure of success.

Areas of greatest successThe most profi table areas for the industry as a whole are Treasury, Corporate Banking, Private Banking and Merchant and Investment Banking. Listings and Privatisations, Micro-lending and Structured Finance (tax) have been the most disappointing markets for the banks over the last year.

Customer Relationship ManagementThe number of banks using Customer Relationship Management systems has increased from 65% in 2002 to 86% this year. However, only four banks record satisfaction with these systems.

IT expenditureExpected IT expenditure has been further reduced this year to approximately US$382 million.

Main fi ndings


Basel IIThe banks continue to make slow progress in the preparation for the implementation of Basel II.

The Big Four banks are best prepared for credit risk management and least prepared for market discipline.

Bank mergersThe majority of banks do not believe that the topic of bank mergers should be revisited before 2006. Only three banks think mergers should be on the agenda in the next twelve months.

Of the Big Four banks and the Investec Bank group, two believe mergers should occur in one to three years, two after three years, and one felt mergers were unnecessary.

Deposit insuranceAmong the nine domestic banks interviewed, only three are in favour of deposit insurance. Only one of the Big Four banks supports the introduction of deposit insurance. The foreign banks are more supportive of deposit insurance than the domestic banks.

Single regulatorThe banks prefer maintenance of the status quo when it comes to bank supervision. This viewpoint is held by seven of the nine domestic banks.

King II and Corporate GovernanceThe Big Four banks unanimously agreed that King II should address the current corporate governance issues. This opinion is held by 15 of the 22 participants.


The top ranked bank/fi nancial institution in each category based on peer ranking is shown in the table below. Comparisons with the rankings for the previous three years’ Strategic Issues reports and the 1999 Investment and Merchant Banking report are also included.

Peer ranking

* ABSA/Standard Bank fi rst for Retail Deposit Taking in 2000 and Standard Bank fi rst

for Retail Lending in 2000.

2003 2002 2001 2000 1999

Corporate LendingStandard Bank(SCMB)

Standard Bank (SCMB)




Corporate Finance – Listings Deutsche Bank FirstRand (RMB) Merrill Lynch FirstRand (RMB) FirstRand (RMB)

Mergers and AcquisitionsFirstRand (RMB)/Standard Bank (SCMB)

UBS Warburg FirstRand (RMB) FirstRand (RMB) FirstRand (RMB)

Capital Markets – Foreign Exchange






Capital Markets – Bonds and Derivatives




JP Morgan JP Morgan

Money MarketsStandard Bank (SCMB)

Standard Bank(SCMB)

Standard Bank(SCMB)

Standard Bank(SCMB)

Standard Bank(SCMB)

Structured Finance FirstRand (RMB) FirstRand (RMB) FirstRand (RMB) FirstRand (RMB)FirstRand (RMB) – Tax-Standard Bank (SCMB) – Project

Brokerage – Institutional Deutsche Bank Deutsche Bank Merrill Lynch Merrill Lynch DMG

Asset Management – Institutional

Allan Gray Allan Gray Investec Investec Investec

Asset Management –Retail Unit Trusts

Coronation Old Mutual Old Mutual Investec/ / Coronation –

Internet Banking ABSA Standard Bank Standard Bank Standard Bank –

Retail Lending and Deposits ABSA Standard Bank Standard Bank ABSA/Standard Bank* –

Retail Mortgages FirstRand Bank (FNB) Standard Bank ABSA ABSA –

Vehicle Financing FirstRand (Wesbank) FirstRand (Wesbank) FirstRand (Wesbank) FirstRand (Wesbank) –

Private Banking Investec Investec Investec Investec –

Private Equity Investments FirstRand (Ethos) FirstRand (Ethos) FirstRand (Ethos) FirstRand (Ethos) –

marketenvironment


Number of retail accountsThe number of retail accounts held by seven banks was calculated at 27.2 million. This is expected to increase to 32.3 million by 2006.

The Big Four banks have 25.7 million accounts at present and project a 23% increase in accounts to 30.2 million by 2006. This fi gure does not include BoE or Cape of Good Hope Bank accounts that now fall within the Nedcor total.

The very small retail client bases of Bank of Athens and Mercantile Bank means that the Big Four banks now account for virtually all of the country’s retail accounts.

Number of retail customersThe Big Four banks currently have 15.9 million retail customers and this is projected to increase by 15% to 18.4 million by 2006.

Big Four Internet customersThe Big Four banks have 825,000 retail Internet customers. This is lower than the estimate given in 2002 of 1 million customers. Three of the Big Four banks gave percentage increase estimates for 2006. They were 53%, 100% and 132%. The combined increase for these three banks suggests that the Internet base would grow by 104%. If this increase is applied to the fourth bank then the Internet total will double to 1.7 million by 2006.

EmployeesThe Big Four banks recorded an employee base of 113,240. Two banks provided estimates of decreases by 2006 of 10.4% and 8.2%, and two banks were unable to provide fi gures. If this average decline of 9.5% is applied to the other two banks the Big Four total employee base will decline to 102,538.

The foreign banks employ approximately 1,776 people (this includes an estimate for one of the 13 foreign banks based on 2002 data).

They are expected to grow by 12.8% (to just over 2,000) by 2006, although two banks anticipate signifi cant declines and only one projects a signifi cant increase.

Micro-lending accountsThe Big Four banks estimate that they have just over 1 million micro-lending clients. Only two banks provided 2006 estimates and both predict declines. People’s Bank is not included in this total.

Background profi le


Competition in the marketplace

Corporate banking

Note: Based on responses from 18 banks

CorporateAs in previous years the vast majority of banks consider the corporate banking market to be intensely competitive. This year 84% viewed it as intensely competitive compared to 88% last year and 78% in 2001.

Over half the group has made signifi cant or fundamental changes in response to this demanding market. Despite the intense competition, 17% of the group made no change to their strategies.

Intensive

Moderate

Light

None

Minor change

Signifi cant operational and organisa-tional change

Fundamental change in strategy and positioning

No change

Response

Co

mp

etit

ion

17% 17% 39% 11%

10% 6%

RetailThe retail market has increased in competitive intensity. Only one of the six responding banks felt it was moderately competitive. Three banks have made signifi cant or fundamental changes to strategy and positioning.

In 2002, 24% recorded no change across 12 banks; this year all of the banks have made some strategic changes.

Competition in the marketplace

Retail banking


Intensive

Moderate

Light

None

Minor change



No change

Response

Co

mp

etit

ion

33% 33% 17%

17%


Merchant and investment bankingMerchant and investment banking continues to be identifi ed as the most competitive part of the banking industry. The dynamism of the sector is demonstrated by the continual process of change.

Last year over half the banks said they had made signifi cant or fundamental changes and the same is true this year.

Some foreign banks have decided to downsize or even exit from this sector.

Internet bankingLast year 26% of banks considered Internet banking to be intensely competitive.

In 2003, half the group view competition as intensive and half the group view it as moderate.

Only 37% of banks have made signifi cant or fundamental changes.

Merchant and investment banking


Intensive

Moderate

Light

None

Minor change



No change

Response

Co

mp

etit

ion

21% 16% 37% 16%

5% 5%

Internet banking


Intensive

Moderate

Light

None

Minor change



No change

Response

Co

mp

etit

ion

13% 13% 24%

13% 37%


Q Can you describe the major developments taking place in the South African fi nancial markets?

Financial Services CharterThree of the Big Four banks mentioned the development of the Financial Services Charter as the most important change currently taking place in the industry. A large foreign bank said the most important change was the Financial Services Charter and interest centred on whether it might follow the terms of the Mining Charter.

Consolidation and the demise of the A2 banksThe virtual disappearance of the A2 banking sector and the resultant heavy concentration among the Big Four banks was also noted as a major change.

Basel IISeveral large banks noted the “pressure” of the lead-up to Basel II, suggesting this is becoming more of a priority issue.

Foreign withdrawalThe term ‘realignment of foreign banks’ was used by participants in last year’s report and this now appears to have translated into references to foreign bank downsizing and withdrawal.

One European bank said that while some foreign banks such as ING have announced their departure, others are also seriously considering leaving. A foreign bank commented on the declining liquidity in the bond markets making South Africa less attractive.

Black empowermentA foreign bank observed that some of the large banks are now moving towards greater implementation of black empowerment. Another European bank suggested that applying such concepts to foreign-owned local entities could lead to their departure.

Legislative changesThese legislative changes include “Know your customer” rules. The Financial Intelligence Act was described as being more far reaching than its equivalent Act in the UK.

Divergence in strategic approachOne foreign bank noted how the Big Four are adopting different strategies and used the example of ABSA and its “Africa orientation”.

It commented on a shift toward extracting value, and while some were seeking to enter external markets others were trying to reduce costs.

Appreciation of the randA few foreign banks noted the strengthening of the rand against other currencies.


Three foreign and three domestic banks opted not to express any criticism of South African banking at present.

The Big FourCertain banks cited their perception of high charges, cartel-like behaviour and poor levels of customer service as criticisms.

Regulatory frameworkOne European bank commented on their perception of the infl uence of the Big Four banks on the regulatory framework to the disadvantage of the foreign banks and smaller banks.

Regulatory controlThere is a feeling among the foreign banks that they are over-regulated. One bank commented that it found SARB stifl ing in its control and demands. It noted the four prudential sessions per year, combined with a joint meeting with their external auditor, and a meeting with the bank’s head offi ce representatives.

Unbanked marketSeveral large banks acknowledged their lack of success on delivery to the unbanked market, and one noted “discomfort” with the Financial Services Charter. One admitted that its own focus was too exclusive and its services too expensive.

Barriers of entryA large foreign bank stressed that the barriers of entry were too high for foreign banks and that the local banks were “isolationist”.

Uneven playing fi eldA large foreign bank commented on the uneven playing fi eld that existed between foreign and domestic banks and cited the onerous endowment capital requirements.

Q Can you identify three major criticisms of South African banking at present?


Technology continues to be the major driver of change in the banking industry.

Several drivers have increased in importance this year. They include Economies of Scale, which has moved into second position from fourth position in 2002.

The demise of foreign interest in South Africa is shown by the fall of Foreign Entrants from sixth position to twelfth position in 2003.

Other factors included:

• Changing market profi les.

• Pressure to service the bottom end of the market.

• Transformation and empowerment.

Q What are the major drivers of change in the banking industry?

16

Q What are the most pressing issues you face? Can you rate them 1 to 5?

The most pressing issues question was further expanded this year to include 31 different factors. Participants were required to score each issue on a scale of 1 to 5, where 5 was most pressing. The 0 centre axis therefore represents 3 in the 1 to 5 scale and those to the right side are “most pressing” and range from 3 to 5.

The most pressing issues question was further expanded to include the expected new Financial Services Charter, the increasing number of new Acts, economic

downturns and AIDS. All of these new issues scored on the positive side of the chart with the exception of AIDS.

Profi t performance represents the most pressing issue for bankers followed by revenue growth. The increasing number of new Acts with which the banks need to comply is ranked in fi fth position.

Basel II has moved from the left to the right side of the axis, indicating increasing importance.


-1.0 -0.5 0.0 0.5 1.0 1.5 2.0

Insurance

Increasing Competition from Non-Banks

Internet Security Risks

Increasing Competition from Foreign Banks

Rogue Trader

Consolidation of Financial Industry

Lack of Adequate Financial Disclosure (eg Enron)

Liquidity of Banks

AIDS

Globalisation

High Dependence on New Technology

Legal Risks

Increasing Competition from Domestic BanksQuality of Loan Books (Credit Risk)

Understanding Complex Pproducts

Appropriate Staff Incentive Schemes

Business Continuity

Domestic economic downturn

Basel II

Recruiting/Training Front Office Staff

Expected New Financial Services Charter

Introducing New Information Technology

Operational Risk Management

Market Volatility

Building a Customer Base

Global Economic Downturn

Increasing Number of New Acts with which Banks need to Comply

Service Quality

Retaining Existing Clients

Improving Revenue Growth

Profit Performance

Based on responses from 22 banks

increasing importance


While there continue to be many similarities between the domestic and foreign banks, there are also noticeable contrasts.

For example, Operational Risk Management, Quality of Loans and the new Financial Services Charter are of less concern to the foreign banks.

However, the continuing need to Build a Customer Base and Market Volatility are important issues for the foreign banks.

Profi t Performance and Improving Revenue Growth are the two most pressing issues for the foreign banks.

Pressing issues:Domestic versus Foreign banks

-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0

Foreign (13)

Domestic (9)

Increasing Competition from Foreign Banks

Insurance

Rogue Trader

Lack of Adequate Financial Disclosure (eg Enron)

Increasing Competition from Non-Banks

Internet Security Risks

Consolidation of Financial Industry

AIDS

High dependence on New Technology

Globalisation

Liquidity of Banks

Market Volatility

Legal Risks

Understanding Complex Products

Domestic Economic Downturn

Increasing Competition from Domestic Banks

Basel II

Building a Customer Base

Recruiting/Training Front Office Staff

Business Continuity

Appropriate Staff Incentive Schemes

Global Economic Downturn

Introducing New Information Technology

Quality of Loan Nooks (Credit Risk)

Expected New Financial Services Charter

Operational Risk Management

Increasing Number of New Acts with which Banks need to Comply

Service quality

Improving Revenue Growth

Retaining Existing Clients

Profit Performance

Increasing ImportanceBased on responses from 22 banks

emergingissues


Q As a foreign bank, what would cause you to reconsider your presence here?

In light of the fact that several foreign banks have either announced their departure from South Africa (such as ING) and certain others have made signifi cant cuts to their personnel and business activities, the 13 foreign participants were asked what would be most infl uential in causing them to review their presence.

Two critical issues were identifi ed • capital requirements, and • compliance and regulation.

Other issues that were raised by a few banks included crime, stability of central government, SARB independence, taxation and exchange controls.

0 1 2 3 4 5 6 7 8 9 10

Availability of skilled personnel

SARB independence

Exchange controls

Other

Rate of taxation

Crime

Stability of central government

Legal requirements

Compliance and regulation

Capital requirements

Number of banks


Q Do you believe that mergers between the largest fi ve banks should be reconsidered?

Q Should deposit insurance be implemented in South Africa?

The participants were asked to record their views on domestic bank mergers.

Interestingly, the majority of banks felt that mergers should not be considered until 2006. Only three banks felt that mergers should be on the agenda in the next twelve months.

The largest fi ve banks’ representatives’ response was as follows: two banks believe mergers should occur in one to three years, two banks thought it would be best after three years and one commented that it did not think it was necessary.

0

5

10

15

After th

ree years

Inone to

thre

e years

Inth

e next 12 month

s

Number ofbanks

Yes


NO

Overall the banks are fairly evenly split for and against deposit insurance with slightly more banks supporting the concept of deposit insurance.

However, within the nine domestic banks only three are in favour of deposit insurance.

This negative stance is even more pronounced among the Big Four banks, where only one bank indicated support.


Q Do you believe that the current Bank Supervision Department regulatory model should be retained, or should there be a single regulator for all fi nancial institutions?

Q Which business model do you believe is most appropriate in banking?

Other

Single regulator

Retained as at present


78%

Single regulator

Retained as at present


58%

Foreign banksDomestic banks

Centralised


Other

De-centralised

There appears to be a preference for a centralised business model.

Eight of the 22 banks opted for a hybrid structure and pointed out that the structure varied according to the needs of the particular business line.

There is a preference to maintain the status quo regarding bank supervision. Almost 80% support retaining the current supervision by the Reserve Bank.

Seven of the nine domestic banks are in support of the current model, while fi ve foreign banks would opt for a single regulator.


Q How much do you think the banking system benefi ts from the A2 sector?

Q What actions could have prevented the A2 banking crisis?

The majority of banks believe that the A2 banks made a contribution to South African banking.

Five banks felt that they provided a signifi cant benefi t. This included two domestic and three foreign banks.

Only two banks believed that they had made little contribution. From this endorsement it is clear that the industry believes that a useful sector has been lost with the demise of a number of smaller banks.

One participant observed “where is the next Investec going to come from?”

There was a general consensus that more decisive action could have been taken earlier by the Reserve Bank on the unfolding A2 banking crisis. Several banks commented that Regal Treasury signalled the fi rst signs of problems in the sector and that more pre-emptive action could have prevented subsequent events unfolding.

There was no discernible difference in the opinions of the domestic and foreign banks. Comments from the domestic banks included:• caused by the Ratings Agencies,

• regulatory environment could have been more favourably disposed to mergers,

• need for much more pro-active supervision,

• Saambou triggered BoE,

• possible confl ict between the Department of Finance and SARB.

A selection of foreign bank comments were as follows:• the Regulator could have been more pro-

active,

• more could have been done by the banking industry and the press,

• a liquidity guarantee from SARB would have helped,

• how transparent were the banks with the Regulator?

0

5

10

15

Verysig

nificant benefit

Signific

ant benefit

Average benefit

Little

benefit

No benefit

Number ofbanks


BackgroundThe second King Report on Corporate Governance was released in 2002.

The fi rst report, under the chairmanship of former high court judge Mervyn King, dates back to 1994.

In the UK there has been the Higgs Report into the role of non-executive directors and the Smith Report on audit committees.

In the US legislation in the form of the Sarbanes Oxley Act has been passed.

Fifteen banks believe King II should address corporate governance concerns in the banking sector.

This includes seven domestic and eight foreign banks.

The Big Four banks unanimously agree that King II should successfully address the governance concerns.

Q Do you believe King II will address corporate governance concerns raised in the banking sector?

Q Is your bank considering the use of XBRL in the future?

BackgroundXBRL (eXtensible Business Reporting Language) is the XML-based standard (markup language for documents containing structured information, comprising both content (words and pictures) and an indication of the role that content plays) for identifying and better communicating the complex fi nancial information in corporate business reports. XBRL makes the analysis and exchange of corporate fi nancial information easier and more reliable.

XBRL provides benefi ts to all members of the fi nancial information supply chain,public and private companies, the accounting profession, regulators, analysts, the investment community, capital markets and lenders, as well as key third parties such as software developers, system integrators, consultants, and data aggregators.

It is a royalty-free, open specifi cation for software developed by a non-profi t consortium consisting of over 170 leading

companies, associations, and government agencies around the world.

XBRL does not set or require changes to existing accounting rules nor require a company to disclose any additional information beyond that which they normally disclose under existing accounting standards. Instead, XBRL improves the processes of preparing, analysing, and publishing the information in business reports. Further information can be obtained from the website:www.xbrl.org

The adjacent chart indicates that 11 of the 22 banks had no knowledge of XBRL. A further six banks responded that they had no plans to introduce XBRL and only fi ve banks, or less than 25%, suggested that they were aware of its planned introduction.

Although, as noted in the preceding paragraphs, XBRL has many clear benefi ts it is perhaps too early to expect awareness to have reached the executives interviewed.

Yes


No

Don'tknow

No comment

NoYes



Participants were asked to examine 20 different issues and score them accord-ing to importance. The number of banks responding to the question is refl ected in parantheses. These issues have been scored in the three previous surveys and changes in ranking are considered useful pointers on operational priorities.

Recruitment of Good Personnel has retreated to second position in 2003, in contrast to the two previous years’ results. Capital Management and Allocation is in fi rst place. Affi rmative Action/Employment

Equity has moved up fi ve places to third position, while Foreign Exchange Control which had been in second place, is now ranked in eigth position.

Following Affi rmative Action is Black Empowerment, which has moved from tenth position to fourth position. Money Laundering has moved up 10 spots to fi th position. In contrast Crime Levels have dropped 10 spots to 16th position.

Q Can you score the following issues in terms of signifi cance to your bank’s operation in South Africa?

2003 2002 2001 2000

Capital Management and Allocation (20) 1 3 10 na

Recruitment of Good Personnel (21) 2 1 1 2

Affi rmative Action/Employment Equity (21) 3 8 8 6

Black Empowerment (21) 4 10 16 na

Money Laundering (21) 5 15 12 14

Emerging Markets Rating (21) 6 5 5 5

Relevance of Regulatory Reporting (21) 7 9 17 13

Foreign Exchange Control (21) 8 2 2 10

Data Security (21) 9 11 6 7

Fraud (21) 10 13 11 na

Stability of Central Government (21) 11 7 4 1

Reserve Bank Independence (21) 12 4 3 3

Tax Legislation (20) 13 17 14 8

Internationalisation of Bank Operations (12) 14 18 15 na

Globalisation (21) 15 14 9 9

Crime Levels (21) 16 6 7 4

Securitisations (21) 17 19 18 na

Opportunities in Sub-Saharan Africa (21) 18 21 21 12

Previously Unbanked Market (12) 19 na na na

Convergence of Financial Markets (21) 20 16 13 11


Differences between the Domestic and Foreign banks

The different bank groups portrayedinteresting contrasts in relation to the operational issues.

Capital Management contrasts as an issue between the foreign and domestic banks. The foreign banks put it in top position while the domestic banks place it in fourth position. The foreign banks also attribute high priority to Money Laundering.

The Previously Unbanked Market is lost in the overall ranking but is very important to the Big Four, who place it in second place after Recruitment of Good Personnel.

All Foreign Domestic Big Four

Capital Management and Allocation (20) 1 1 4 6

Recruitment of Good Personnel (21) 2 2 1 1

Affi rmative Action/Employment Equity (21) 3 5 2 3

Black Empowerment (21) 4 7 3 5

Money Laundering (21) 5 3 10 7

Emerging Markets Rating (21) 6 6 12 9

Relevance of Regulatory Reporting (21) 7 8 7 12

Foreign Exchange Control (21) 8 4 18 19

Data Security (21) 9 11 5 8

Fraud (21) 10 10 16 16

Stability of Central Government (21) 11 14 9 14

Reserve Bank Independence (21) 12 12 11 17

Tax Legislation (20) 13 16 8 4

Internationalisation of Bank Operations (12) 14 17 14 13

Globalisation (21) 15 9 20 15

Crime Levels (21) 16 15 13 11

Securitisations (21) 17 13 19 20

Opportunities in Sub-Saharan Africa (21) 18 18 15 10

Previously Unbanked Market (12) 19 20 6 2

Convergence of Financial Markets (21) 20 19 17 18


Q Collaboration as a tool for Domestic and Foreign banks

High


Medium

Low

High


Medium

Low

High


Medium

LowHigh


MediumLow


Medium

Low

High


Medium

LowHigh


Medium

Low High

High


MediumLow

Achieving cost fl exibility

Customer acquisition

Customer retention

Flexible operating model

The participants were asked how important they believed collaboration with partners both inside and outside the fi nancial sector would be in the future. Domestic banks are shown on the left column and foreign banks on the right.

Domestic banks believe that collaboration would be advantageous in helping attract new customers.

As expected the foreign banks, when compared to the domestic banks, see fewer opportunities for collaboration in each of these four scenarios.

A number of domestic banks rate collaboration in the “high” category when it comes to both achieving cost fl exibility and a more fl exible operating model.

Domestic banks Foreign banks





One bank envisages a continuation of its very signifi cant outsourcing by 2006. A number of banks predicting signifi cant outsourcing will double to six banks by 2006.

As reported in previous surveys, South African banks have a limited appetite for outsourcing and appears unlikely to change.

0

2

4

6

8

10

2006

2003

VerySignificant

SignificantModerateMinorNone

Numberof banks

Q How important is outsourcing at present and how important is it expected to be in 2006?

performance


The chart indicates the rate of revenue growth anticipated by 20 respondents.

On the right side of the axis are the pro-jected growth rates for 2003 and on the left side are the projected annual rates for 2006.

Q What is your estimate of the annual growth in revenues of your business for 2003 and over the next three years?

Annual projected growth ratesfor the next three years

Annual projected growthrates current year


The participants ranked factors used to measure success in their bank’s operations in South Africa.

The 2003 scores are based on 22 banks, while the 2002 scores were based on responses for 30 banks.

Return on Capital has edged out Image and Reputation from the top position. Both Client Retention and the Cost to Income ratio have moved up the ranking in 2003.

Share Price maintains its position at the bottom of the scale, with a signifi cantly reduced score.

How the Big Four banks rate the importance of measures

The Big Four banks recorded the same scores as 2002 for four of the top six measures.

Earnings Per Share increased in importance in 2003, while Image and Reputation recorded a marginal decline.

Little change was evident in most factors, with the exception of Return on Assets.

Q What factors are used to measure success in your bank’s operations?

0

1

2

3

4

5

2002

2003

Share Pric

e

5 year retu

rn on sh

arehold

er investm

ent

Earnin

gs per S

hare

Investm

ent Perfo

rmance

Size of O

n Balance Sheet A

ssets

Return

on Ass

ets

Absolu

te Pro

fit B

efore

Tax

Revenue/Clie

nt Relatio

nship

Client P

rofit

ability

Revenue Gro

wth

Cost/In

com

e Ratio

Client R

etentio

n

Image and R

eputatio

n

Return

on Capita

l

Score

0

1

2

3

4

5

2003

2002

Size of O

n Balance Sheet A

ssets

Absolu

te Pro

fit Befo

re Tax

Share Pric

e

Return

on Ass

ets

Investm

ent Perfo

rmance

Revenue/Clie

nt Relatio

nship

Client P

rofit

ability

Cost/In

com

e Ratio

5 year retu

rn on sh

arehold

er investm

ent

Client R

etentio

n

Revenue Gro

wth

Image and R

eputatio

n

Earnin

gs per S

hare

Return

on Capita

l

Score


To ascertain which bank segments have recorded contrasting levels of profi tabil-ity, the banks were asked to select return categories in sectors in which they were active. Not all banks answered this ques-tion and they only responded for sectors in which they are active. Contrasting colours are used to distinguish between foreign and domestic participants.

The most profi table areas for banks in general are Retail Banking, Corporate Banking, Merchant and Investment Banking and Treasury.

Five banks are in the very or extremely profi table boxes for Private Banking, Corporate Banking, and Merchant and Investment Banking, and six banks are in these boxes for Treasury.

Bank profi tability in a number of different segments over the last year

competitionand positioning


Q Do you believe the banking market continues to be overcrowded?

Q What is your bank’s cross-sell ratio?

A dramatic change has occurred in response to the level of overcrowding in the market.

Although some banks feel that some segments are still overcrowded in 2003, only 40% now classify the market as a whole to be overcrowded.

This contrasts dramatically with the 88% overcrowded response in 2002.

It confi rms that the shakeout discussed in earlier reports has now happened. Several banks commented on the lack of competition in the retail sector.

No

Yes

60%

40%

The Big Four banks responded to the question of cross-selling by providing a breakdown across the top, middle and bottom retail tiers.

As the data indicates, at the bottom end banks struggle to cross-sell services, with the highest ratio being 1.7. At the top end the ratio rises to over four services for one bank, around three services for two banks and just two services for the remaining bank.

Bank A Bank B Bank C Bank D

Top tier retail 4.3 2 3.5 2.9

Middle tier retail 2.6 3 1.8 1.3

Bottom tier retail 1.7 1.5 1 1.2


Twenty four different markets were identi-fi ed, covering both retail and investment and merchant banking. If the participating banks were deemed to be active in a par-ticular market, they scored their perceived levels of success on a scale of one to fi ve where one was “very unsuccessful” and fi ve was “very successful”.

Since three is perceived as neutral, to sug-gest a degree of measurable success, it is important that the average scores for the participants in that market exceed three.

Figures in parentheses indicate the number of participants providing a score in that particular market. In the radar diagrams appearing on the following pages, a 24-sided frame based on the value of three has been drawn. If the line pierces the frame (e.g. the line moves to the outside of the circle frame), success has been achieved in that respective market.

Q How successful has your bank been in penetrating the following markets in the last year?

On an industry-wide level, a lack of success was recorded in the Corporate Finance sector (listings and privatisations) Structured Finance (Tax) and Micro-Lending. Credit cards and Retail Deposit Taking have improved noticeably since 2002.

All banks – Levels of success

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0Micro Lending (5)

Vehicle Financing (7)

Structured products (14)

Insurance - Short Term (5)

Insurance - Life (5)

StockBrokerage (11)

ForeignExchange (18)

Private Banking (12)

Asset Management (9)

Capital Markets (14)

e Banking (10)Unit Trusts (8)

Mortgages (7)

Retail Deposit Taking (8)

Credit Cards (7)

Retail Lending (7)

CommercialLending (17)

Treasury (15)

PropertyFinance (8)

Structured Finance- Projects (13)

Structured Finance-Tax (13)

Corporate Finance- Privatisations (15)

Corporate Finance- Listings (14)

Corporate Finance - M & A (15)


Foreign banks – Levels of success

Domestic banks – Levels of success

Key areas of success for the foreign banks include Treasury, Capital Markets, Lending and Foreign Exchange.

Those foreign banks with a brokerage arm also recorded satisfactory performance.

The domestic banks recorded very positive scores for Structured Finance – Projects, Treasury, Capital Markets, Structured

Products and across a range of retail products.

1

2

3

4Micro Lending (5)



Insurance- Short Term (4)


Stock Brokerage (7)

Foreign Exchange (8)

Private Banking (7)


Capital Markets (6)

e Banking (6)

Unit Trusts (6)

Mortgages (6)


Credit Cards (6)

Retail Lending (6)


Treasury (7)

PropertyFinance (7)


Structured Finance- Tax (6)


Corporate Finance - Listings (7)

Corporate Finance- M & A (7)

1

2

3

4

5Micro Lending (0)





Stock Brokerage (4)


Private Banking (5)


Capital Markets (8)

e Banking (4) Unit Trusts (2)Mortgages (1)


Credit Cards (1)

RetailLending (1)


Treasury (8)

PropertyFinance (1)

Structured Finance-Projects (7)



Corporate Finance - Listings (7)

Corporate Finance - M & A (8)


The Big Four banks record values exceeding 4 out of 5 in a variety of markets.

Micro-Lending, Privatisations and Commercial Lending are the sectors where the Big Four banks believe they have been least successful.

Big Four banks – Levels of success

1

2

3

4

5Micro Lending (4)



Insurance- Short Term (4)


Stock Brokerage (4)

ForeignExchange (4)

Private Banking (4)


Capital Markets (4)e Banking (4)

Unit Trusts (4)Mortgages (4)


Credit Cards (4)

Retail Lending (4)


Treasury (4)

PropertyFinance (4)




Corporate Finance -- Listings (4)



To identify the markets that the banks believe will be of greatest importance over the next three years, the 22 participants ranked the following 24 markets on a scale of one to fi ve.

Once again, a score of one indicates little or no importance while a score of fi ve can be considered very important.

Since three is perceived as neutral, average scores for the group should exceed three, and therefore markets viewed as important project beyond that line.

Q How important are the following markets for your bank over the next three years?

Future importance – All banks

1

2

3

4

5Structured products (17)



Stock Brokerage (11)


Trust Services (12)

PrivateBanking (13)

AssetManagement (13)


Unit Trusts (9)

Mortgages (7)

Retail Deposit Taking (9)e banking (9)

Micro-Lending (4)


Credit Cards (8)

Retail Lending (8)


Treasury (19)

PropertyFinance (10)






Looking forward to 2006 the overall scores suggest a broad spectrum of interests. The retail sector (with the exception of Micro-Lending) records very positive scores.

The areas mentioned previously as successful record the strongest support. They are Projects, Treasury, Commercial Lending and Foreign Exchange.


Future importance – Domestic banks

Future importance – Big Four banks

1

2

3

4




Stock Brokerage (7)


Trust Services (7)

Private Banking (7)

AssetManagement (7)

Capital Markets (7)

Unit Trusts (6)

Mortgages (6)

Retail DepositTaking (7)

Internet banking (7)

Micro-Lending (4)


Credit Cards (7)

Retail Lending (6)


Treasury (8)

PropertyFinance (7)






1

2

3

4




Stock Brokerage (4)


Trust Services (4)

Private Banking (4)

AssetManagement (4)

Capital Markets (4)

Unit Trusts (4)

Mortgages (4)

Retail Deposit Taking (4)Internet banking (4)

Micro-Lending (4)


Credit Cards (4)

Retail Lending (4)


Treasury (4)

Property Finance (4)






The domestic banks recorded high scores for Structured Finance – Projects and Structured Products. Internet Banking,

which fell below three in 2002, has an average score of 4.2 across seven participants.

Stock Brokerage and Micro-Lending (as noted) fall inside the importance circle with values less than three.

Scores almost reach the maximum level of fi ve for Retail Deposit Taking, Credit Cards and Internet Banking.


Future importance – Foreign banks

1

2

3

4




Stock Brokerage (4)


Trust Services (5)

Private Banking (6)



Unit Trusts (3)

Mortgages (1)

Retail DepositTaking (2)

Internet banking (2)

Micro-Lending (0)


Credit Cards (1)

Retail Lending (2)


Treasury (11)

PropertyFinance (3)






Areas that generally have high levels of future importance to the foreign banks are Treasury, Foreign Exchange, Capital Markets, Commercial Lending and Structured Products.

Other areas record high scores, but the fi gures in parenthesis indicate that there are often few participants in this product area.

in bankingongoing issues


Q Do you currently use a CRM system? Yes/No

Q On a scale of 1 to 5, where 5 is very satisfi ed, how satisfi ed are you with the system?

As before, a key factor is the level of satisfaction with the Customer Relationship Management system.

Little progress appears to have been made on this front. Only four banks record satisfaction (the same as last year).

The number of banks choosing a neutral response in 2003 was six foreign and three domestic – exactly the same breakdown as last year.

In 2002 almost two thirds of the group said they had a customer relationship management system. This year that fi gure has increased to 86%.

No

Yes

14%

86%

0

1

2

3

4

5

6

Domestic banks

Foreign banks

verysa

tisfie

d

satis

fied

neutral

unsatis

fied

veryunsa

tisfie

d

Number ofbanks


The participants were asked to describe what they believed would be the top applications of technology in banking by 2006.

One application – wireless, emerged as the most likely to cause radical change. Eight of the nine domestic banks mentioned wireless alongside fi ve of the 13 foreign banks.

There was a general consensus that the wireless technology was available but some banks pointed out that it could be fi ve years before the population at large embraced a new mobile-based approach to banking.

The smart card was also considered to be a signifi cant step forward and several banks mentioned its use in conjunction with biometric identifi cation.

One large European bank said that in the trade fi nance and cost management areas, there had been a move to generic software from proprietary (bank developed) applications.

Other technology-driven changes in the sector expected to increase in importance by 2006 were;• user confi gurable services, including

dynamic pricing;

• Peer-to-Peer computing;

• offshore processing; and

• single view of the client relationship (aggregation).

In the 2002 report IT expenditure was estimated to be around US$500 million. This was a US$100 million reduction from the previous year.

In 2003, IT expenditure has been further reduced to US$382 million.

The Big Four banks are estimated to account for approximately US$300 million of this total, while the 13 foreign banks make up only US$11.5 million (US$12 million in 2002). Five foreign banks individually spent more than US$1 million on IT.

It is clear that the industry continues to trim its IT budgets.

Q What do you believe will be the most important applications of technology to banking by 2006?

Q Can you quantify your bank’s IT development spend in the South African market?


The concept of ValueReporting was introduced in previous reports. This page simply reminds the reader of the PricewaterhouseCoopers ValueReporting model, while the following two pages update its usefulness in relation to banks in South Africa

The model has four principal elements, which deal with the information that should be covered in any report, presentation and other communication.

The fi rst element, Market Overview, should cover industry dynamics, current and anticipated future economic, regulatory and competitive conditions.

The second element, Value Strategy, articulates the company’s growth strategy and how it plans to create value for its stake holders. It must be forward-looking, focused and tailored to the company.

The third element is Managing for Value, which communicates clearly how a com-pany’s strategy is being executed through day-to-day management activities. Here management needs to disclose the metrics it uses to measure overall fi nancial per-formance and risk and the value created by individual segments and group operations.

The ValueReportingTM Model emphasises the importance of communicating share-holder value orientated measures, such as EVA (Economic Value Added) and RAROC (Return on Risk Adjusted Capital).

Finally, the fourth element, Value Platform, describes the action taken by management to execute the strategy and invest in activi-ties that underpin long-term value growth. This requires a clear focus on the compo-nents of the Value Platform, namely Innova-tion, Brands, Customers, Supply Chain, People, and Corporate Reputation.

Background to ValueReportingTM


While the same concept of ValueReporting was described to participants this year, they were asked to record their views in quite a different way to 2002.

The banks were asked to consider its use in the context of extending facilities from the bank to a client. In other words as bankers how useful did they feel ValueReporting would be in making good lending decisions.

The participants rated each of the 19 components of the ValueReporting TM

model on a scale of 1 to 5 where 5 was considered to be most important.

As one would expect, the strongest endorsement was in the area of Managing for Value, where the average score exceeded 4 out of a possible 5.

As a rule, the foreign banks recorded higher interest levels – with the exception of the Managing for Value area. Domestic banks recorded somewhat lukewarm responses in the Value Platform area, with marginally positive scores for Innovation, Brands and Supply Chain.

Domestic bankers also indicated rather low scores for information on Goals and Objectives.

Usefulness of ValueReportingTM in making good lending decisions

Market overview

Value strategy

Managing for value

Value platform


ValueReportingTM Factor Very unimportant Very important 1 2 3 4 5

Market Overview

Competitive environment 1 0 0 2 1

Regulatory environment 0 1 1 1 1

Macro-economic environment 0 2 0 1 1

Value Strategy

Goals 1 1 0 1 1

Objectives 1 1 0 1 1

Governance 0 0 1 0 3

Organisation 0 1 0 2 1

Managing for Value

Financial performance 0 0 0 1 3

Financial position 0 0 0 1 3

Risk management 0 0 0 0 4

Segmental reporting 0 0 0 1 3

Value Platform

Innovation 0 2 0 1 1

Brands 0 2 0 1 1

Customers 0 1 1 1 1

Supply chain 0 3 0 0 1

People 0 0 0 2 2

Reputation - Social 0 1 1 2 0

Reputation - Environmental 1 1 0 2 0

Reputation - Ethical 0 1 0 1 2

The Big Four banks awarded the highest scores to the Managing for Value area.

They also showed strong interest in Governance and People. Social and Ethical reporting was also valued as important.

ValueReportingTM and the Big Four banks


Background to the new Capital Accord

The proposed new Capital Accord of the Basel Committee fi rst issued for public comment in January 2001 was a radical reform of the previous 1998 Capital Accord.*

The implementation of the Accord by 2007 means that increasing attention must be given to systems and process changes. To track progress along the path participants were asked again this year how well prepared their organisation was in relation to fi ve key areas:

• Strategic issues• Credit risk management• Operational risk management• Regulatory relations• Market discipline

These key areas are broadly indicative of issues that require management attention.

Before describing the responses of participants it is useful to provide some further insight into the fi ve key areas contained in the question.

Strategic issues

Boards and senior management will need to prioritise a range of issues, which include regulatory capital, credit and operational risk, data requirements, the impact of greater public disclosures on the market and investor perceptions. Changes to the capital structure of bank groups will also probably have signifi cant tax implications and this will need to be reviewed.

Credit risk management

Many regulators may expect or require institutions to use the Foundation and Advanced Internal Ratings Based Approaches to credit risk management. The proposals require this approach to be consistently applied on a global basis. The scale and complexity of data requirements in this area will be very substantial.

Operational risk management

Large or complex institutions will be expected by their regulators to meet all the conditions for the intermediate or advanced approaches to operational risk capital.

Most institutions will have to make further investment in operational risk management functions, techniques and policies to qualify for the intermediate approach. Institutions will need to assess the relevance to them of operational risk mitigation techniques such as insurance and outsourcing.

* Challenges of the new Basel Accord - Actions for senior management, PricewaterhouseCoopers, April 2001

The relationship between banking supervisors and banks’ external auditors, Bank for International Settlements, January 2002


Regulatory relations

Institutions need to ensure they have a demonstrably robust process for:

• Assessing their overall capital under the new basis in relation to their risk profi le, as well as allocating economic capital;• Maintaining their capital levels;• Monitoring compliance under the new requirement; and• Assessing likely returns on individual businesses against the capital used.

These processes will be subject to regulatory scrutiny and institutions should expect supervisors to be a lot more probing in areas such as:

• Internal processes used to assess capital adequacy/allocation of economic capital and• Compliance with minimum qualifying standards for internal measurement methodologies, credit risk mitigation and securitisation.

Market discipline

The proposals signifi cantly increase the level of disclosure for all institutions. Many institutions will fi nd the half yearly (and potentially quarterly) disclosures particularly demanding. The resultant data implications and investor relations will be a major issue.

The banks were asked to score on a scale of 1 to 5, where 5 was very prepared, their readiness for implementation of Basel II.

These results should only be interpreted as a general indicator of preparedness based on very subjective opinions. They do, however, provide a rough guide to the level of progress of the participants on the fi ve important issues described on the preceding pages.


Domestic banks

Foreign banks

Progress towards implementation is refl ected in the fact that in 2002, six check marks were placed in the “very unprepared” column. This year there are none. Nine check marks were located in column 4 and one in column 5.

The table, however, shows that most banks assess that they are in columns 2 or 3, which suggests they are at best moderately prepared.

In keeping with 2002 results, overall the foreign banks when compared to the domestic banks recorded much more positive scores in their level of preparation.

It would appear that three or four banks are now very prepared for Basel II.


The Big Four banks have made marginal progress. They appear best prepared in the credit risk management area and least prepared on market discipline.

Big Four Banks

simplifyto succeed


Simplify to Succeed A paper entitled “Simplify to Succeed” produced by PricewaterhouseCoopers’ former consulting practice PwC Consulting, now IBM Business Consulting Services, described the practical steps that fi nancial institutions need to take to succeed in tomorrow’s retail fi nancial services sector. The paper identifi ed ten priority actions for tomorrow’s leaders to ensure success.

In this current research it was decided to include a question that described each of these priority actions. The participants were then asked to record on a scale of 1 to 5 their level of progress in implementing each action.

It is acknowledged that the actions were originally developed from a retail perspective, but their application to wholesale banking is equally valid.

To better understand the contents of the paper, a brief summary of the two models used is provided before discussing the South African responses. In addition, a separate breakdown of the Big Four banks is also provided, which indicates their perceived level of progress on each recommend action. A detailed breakdown of the ten priority actions has been included in an Appendix.

Simplify to Succeed concluded that many fi nancial institutions have found it diffi cult to keep up with market developments and that this has resulted in business models based around products or channels that are integrated from front to back.

It contends that what is needed is to service evolving customer needs by optimising customer facing activities. It argues that

the mathematical approach to business expansion has made business models increasingly infl exible.

Furthermore, legacy systems are expensive to maintain and hamper innovation and work against the advantages of straight through processing.

In response the paper recommends that fi nancial institutions redesign their business models so that they;• are capable of handling rapid change

• possess both scale and fl exibility

• secure the long-term loyalty of the customer.

The paper describes a value chain of three business areas – distribution, manufacturing and operations, which can be broken down into building blocks or components that have responsibility to deliver agreed service and cost levels.

Financial institutions need to manage each component separately and strive to extract minimum value from that part of the business.

The two models are explained on the following page.


Today’s typical Traditional model

Component Model

Mass RetailSegment

Mass AffluentSegment

PrivateBankingSegment

Sub-PrimeSegment

Ultra HNWSegment

A component model provides business flexibility and process optimisation- Distributions tuned to the customer segment- 'Assembled' product combinations re -use manufacturing capabilities

regardless of sources- Operations achieve enterprise wide scale economies

OperationsGeneralised operations and sharedfacilities

DistributionSector differentiated marketing, salesand delivery

ManufacturingProduct options support andComponent based manufacture

Low cost, High Quality Servicing

Parameterised Product Assembly

Customers• Customers are primarily targeted through

product silos. Customer segments are within product silos.

• Customer data is collected but fragmented and not available to drive real-time decision-making.

Distribution• Channels are developed separately and

“bolted-on” to the business model.• Distribution is optimised for economies

of scale within product and business silos.

• Remuneration is based on volume and growth metrics.

Product development• Products are typically viewed in silos

with little organisational fl exibility.• Products and services are developed to

address evolving needs as perceived by product/business unit silo. A different or new product option typically spawns a new product line.

Operations• Operations are typically optimised at the

product or business unit level.• Rigid organisational boundaries restrict

ability to outsource or to collaborate with other entities.

• Operations are based in high-cost developed economies, with traditional role-based remuneration structures.

• Physical assets are owned by Financial Institutions. Major political hurdles to overcoming the costs associated with physical branch space through divestiture.

Performance metrics and linkages• Profi tability measures are at the product/

business unit level and are geared to maximise value of product/ business unit silos.

• Performance metrics interaction is tightly coupled between component parts of

product/ business unit silos.• Valuation is based on “assets in place”.

Customers • Customers are targeted by segments.

Products and services are organised by segment.

• Customer data is integrated and drives event-based interaction at touch points.

Distribution • Multiple channels are integrated

seamlessly. • Distribution is optimised to maximise

customer loyalty and lifetime value. • Remuneration has customer satisfaction

and loyalty metrics baked in. Product development • Products are sourced from the most

appropriate manufacturer within or outside the organisation.

• Products and services are either manufactured or assembled to address customer segment needs.

Operations • Operations are optimised at the

enterprise level. • Transparent organisational boundaries

enable Financial Institutions to outsource or collaborate to address changing business conditions.

• Operation placement decisions refl ect the ability to leverage “wage arbitrage”

opportunities by migrating to lower cost economies. • Branch space can be franchised, and

capital management techniques are utilised (e.g. property sale and leaseback).

Performance metrics and linkages • Best in class economics and profi tability

measures are at the component level, structured to maximise value across all components.

• Rights, obligations, performance measures and service level agreements are clearly articulated at the component level.

• Valuation is based on profi tability and high growth options.

Component Based model of the future

Simplify to Succeed, PwC Consulting, 2002


The ten priority actions are recorded below. A more detailed description of these actions has been included as an Appendix.

Participants were asked to mark on a scale ranging from 0 to 5, where 5 indicated maximum progress, their level of progress on each recommended action.

They could also record NA if they felt the action was inappropriate. The results are shown for domestic, foreign and the Big Four banks on the next three pages.

• Rapidly migrate to a customer segment model for the customer-facing parts of your business.

• Build and reward loyalty to extract the fullest value from the customer.

• Make Customer Relationship Management a long-term philosophy.

• Broaden the range of products and services to embrace the entire spectrum of customer needs.

• Supply services outside traditional boundaries.

• Learn the skills of product assembly.

• Drive component owners to be best in class.

• Take advantage of wage arbitrage in lower cost economies.

• Make the culture of operations become more entrepreneurial.

• Ensure your programme has top-level sponsorship and that the sponsors accept that this is a long-term change exercise.

The ten priority actions


Domestic banks’ progress on Simplify to Succeed priority actions

The domestic banks recorded scattered progress for most priority actions. Only one bank has selected “very prepared” for three of the 10 priority actions.

Furthermore, in the case of nine of the actions there are at least two banks that fall on the “unprepared” side of the scale. This suggests much progress needs to be made along the scale in these areas.


Foreign banks’ progress on Simplify to Succeed priority actions

The foreign banks would appear to be better prepared than the domestic banks. This may refl ect the infl uence of their head offi ce or the fact that they tend to operate in narrow market niches making it easier for them to believe that they have a customer segmented model or have made CRM a long- term philosophy.

What is clear is that only a few banks record less than 3 (prepared).


The Big Four banks believe they have made sound progress in terms of the recommended actions. However, only one check is recorded for two of the 10 actions when it comes to being “very prepared”.

Big Four banks’ progress on Simplify to Succeed priority actions

canadian and australian

perspectives


The treatment of the following topical issues, which are discussed in this report, in Canada and Australia, have been high-lighted:

• Bank mergers

• Deposit insurance

• Regulatory control

Bank mergersIn both Canada and Australia, bank merg-ers are seen to be politically driven issues.

In Canada, in November 2002 the Senate Banking Committee concluded that one or possibly two mergers would be in the public interest. In other words, the Big Five Canadian banks could, through two sets of mergers, be reduced to the Big Three. In March 2003, the House of Commons Finance Committee found that mergers among Canada’s big banks are a “legiti-mate business strategy” but that any institu-tions considering joining forces need to:

• ensure adequate service levels for both consumers and small businesses, and

• need to work to minimize retrenchments.

Although the Committee asked the Gov-ernment to respond in 90 days there is a sense that approval for bank mergers may be delayed until the retirement of Prime Minister Jean Chretien (expected in early 2004), and his replacement.

When mergers were previously tabled, then Finance Minister Martin, prevented the merger of Royal Bank of Canada and Bank of Montreal, and TD-Canada Trust and CIBC (four of the Big Five banks).

In Australia, mergers between the four largest banks were denied by public

policy stances taken by successive Federal Governments. In Australia, two agencies undertake a concurrent assessment of a proposed merger. The ACCC (Australian Competition and Consumer Commission) reviews the competitive affects of a pro-posed merger whilst the APRA (Australian Prudential Regulatory Authority) examines the prudential aspects of a merger. Both agencies report to the Federal Treasurer who then makes a fi nal decision based on the “national interest”.

The four pillars policy in Australia began as a six pillars policy in 1990 when the Keating Government announced no merg-ers would be permitted between the four major banks and two major life insurance companies. This became the four pillars policy after the Financial System Inquiry in 1997.

Deposit insuranceAustralia does not have a formal deposit insurance arrangement in place. However, observers consider that it is “implicit” that the Government would underwrite any failure by an Australian bank in relation to individual deposits.

In contrast Canada has an arrangement in place, which is “explicit” and provides cover on personal deposits up to C$60,000 or approximately US$40,000. The Canada Deposit Insurance Corporation (CDIC) is a federal Crown Corporation. It came to being in 1967 and reimburses depositors for the amount of their insured deposits when a member institution fails. To be eligible for insurance, deposits must be in Canadian currency and be payable in Canada. Term deposits must be repayable

Canadian and Australian perspectives on certain issues raised in this report


no later than fi ve years from the date of deposit.

CDIC has provided protection to depositors in 43 member institution failures. As at 30 April 2002, CDIC insured approximately C$347 billion in deposits.

Regulatory controlIn Canada, The Offi ce of the Superintend-ent of Financial Institutions (OSFI) is the primary regulator of federally chartered fi nancial institutions and federally adminis-tered pension plans. All banks are feder-ally registered, although for example, an insurance company could be federally or provincially regulated. OSFI’s mission is to safeguard policy holders, depositors and pension plan members from undue loss. OSFI regulates and supervises more than 130 deposit-taking institutions in Canada, including domestic banks, foreign bank subsidiaries, foreign bank branches (both full service and lending branches), trust companies, loan companies and coopera-tive credit unions.

OSFI and Canada Deposit Insurance Cor-poration (CDIC) have jointly developed a Guide to Intervention for Federal Financial Institutions. The Guide provides a frame-work for responding effectively to circum-stances that could lead to the instability of a fi nancial institution. Formalizing a proc-ess for early intervention if potential prob-lems are identifi ed increases the likelihood of averting the institution’s failure. The Guide can be found on the OSFI website, www.osfi -bsif.gc.ca/eng/how/index.asp.

The Guide explicitly describes the supervi-sory assessment and intervention process. It outlines the actions or options available to OSFI and CDIC, individually and jointly, to

address the institution’s circumstances that are the source of concern. It also defi nes a graduated and progressive set of responses depending on the institution’s situation and the degree of weakness perceived.

Australia, like the United Kingdom, has a single regulator. The Australian Pruden-tial Regulatory Authority is the prudential regulator of the fi nancial services industry that includes banks, credit unions, building societies, general insurance and reinsur-ance companies, life insurance, friendly societies, and most members of the super-annuation industry. It currently regulates $1.5 trillion in assets for 20 million Austral-ians.

Authorised Deposit-Taking Institutions (ADIs) are corporations which are author-ised under the Banking Act 1959. ADIs include banks, building societies and credit unions.

All ADIs are subject to the same Prudential Standards but the use of the names ‘bank’, ‘building society’ and ‘credit union’ are subject to corporations meeting certain criteria.

peerreview


Q Can you name the top three banks in terms of success (performance, presence, momentum, etc.) across a variety of different markets?

Corporate fi nance – Listings

As in previous years the participants ranged from retail banks to merchant and invest-ment banks to universal banks.

A simple scoring method awarded 3 points to fi rst place, 2 points to second and 1 point to third place. This allowed the banks to be ranked based on a total score.

The arrow in the right-hand column por-trays a directional change in ranking from last year’s report.

Banks were asked not to record an opinion unless they were active in that segment and were comfortable in providing an accurate ranking in terms of success (performance, presence and momentum) as apposed to mere size. They were not permitted to rank their own institution. Often banks would choose just fi rst or second-ranked banks.

Corporate bankingRanking First Second Third Score Change

Standard Bank (SCMB) 13 1 41 �

FirstRand Bank

(FNB Corporate) 1 7 4 21 �

Nedcor 1 3 8 17 �

ABSA 1 3 9 �

Citibank 1 1 �

Investec 1 1 �

§ Based on 16 banks

Ranking First Second Third Score Change

Deutsche Bank 4 1 2 16 �

JP Morgan Chase 2 1 8 �

Investec 1 1 1 6 �

Merrill Lynch 1 1 5 �


UBS Warburg 1 1 3 �

FirstRand Bank (RMB) 1 2 �

Nedcor 1 1 �

§ Based on 9 banks


Mergers and acquisitions

Capital markets – Foreign exchange trading

Capital markets –Bonds and derivatives


FirstRand Bank (RMB) 2 2 2 12 �

Standard Bank (SCMB) 2 1 4 12 �

Investec 4 1 9 �

UBS Warburg 1 2 1 8 �

Merrill Lynch 2 6 �


Nedcor 2 6 �


Goldman Sachs 1 1 4 �

CSFB 1 2 �

CorpCapital 1 1 �




FirstRand Bank (RMB) 6 4 16 �

Nedcor 1 3 3 12 �

ABSA 1 2 4 11 �



Investec 1 2 4 �

Citibank 1 3 �






Deutsche Bank 2 6 �


Decillion 2 1 5 �

Nedcor 3 3 �

Barclays 1 3 �

Mettle 1 3 �

Goldman Sachs 1 2 �

ABSA 1 1 �

CSFB 1 1 �



Money markets

Structured fi nance

Brokerage – Institutional




ABSA 1 3 3 12 �

Nedcor 1 3 2 11 �

Investec 1 1 5 �




Standard Bank (SCMB) 2 4 3 17 �


Nedcor 1 3 5 �

ABSA 1 1 3 �




UBS Warburg 2 3 1 13 �

Merrill Lynch 1 4 1 12 �


Investec 1 1 3 �

Old Mutual 1 3 �

Barnard Jacobs Mallet 1 3 �

JPMorgan Equities 2 2 �

Coronation 1 2 �

FirstRand Bank 1 1 �


Asset management – InstitutionalRanking First Second Third Score Change

Allan Gray 5 2 17 �

Old Mutual 4 1 1 15 �


Coronation 3 6 �

Standard Bank (STANLIB) 2 2 6 �

Deutsche Bank 1 3 �

Mettle 1 3 �

Sanlam 1 2 �

AIG 1 2 �

Goldman Sachs 1 1 �



Asset management – Retail unit trusts


Coronation 5 1 16 �

Old Mutual 2 2 1 11 �


Standard Bank (STANLIB) 1 2 7 �

Allan Gray 1 1 3 �

Sanlam 2 2 �

FirstRand Bank 2 2 �

§ Based on 9 banks

Retail lending and deposits Ranking First Second Third Score Change

ABSA 3 1 2 13 �

Standard Bank 3 1 1 12 �

FirstRand Bank (FNB) 4 1 9 �

Nedcor 1 1 2 7 �

§ Based on 7 banks

Vehicle fi nancing

Retail mortgagesRanking First Second Third Score Change

FirstRand Bank (FNB) 3 2 1 14 �


ABSA 2 2 1 11 �

Nedcor 1 2 5 �

§ Based on 8 banks


FirstRand Bank (Wesbank) 7 21 �

ABSA (Bankfi n) 1 3 1 10 �

Standard Bank (Stannic) 2 3 7 �

Nedcor 1 1 3 �

§ Based on 8 banks


Internet banking

Private banking

Private equity investments


ABSA 5 1 17 �


FirstRand Bank 3 2 8 �

Nedcor 1 3 6 �

UBS Warburg 1 3 �

Barclays 1 2 �

Investec 1 1 �



Investec 7 1 23 �

FirstRand (RMB

Private Bank) 1 3 1 10 �

Nedcor (Syfrets) 1 2 3 10 �

Standard Bank 1 3 5 �

ABSA 1 1 5 �

UBS Warburg 1 3 �

CSFB 1 2 �

HSBC 1 1 �



FirstRand (Ethos) 6 18 �

Brait 1 3 1 10 �

Standard Bank 1 2 7 �

Investec 1 2 4 �

§ Based on 8 banks

appendices


Methodology 71

Bank groups 72

Participants 73

Background comments on participants 74

December 2002 Quarterly DI 900 Analysis of South African Banks 79

Simplify to Succeed – Priority actions 81

Appendices


Methodology

Previous experience has shown that personal interviews with senior bankers using a standard questionnaire offers the best research approach. The questionnaire contained 33 questions and was completed during interviews of approximately one hour. The author conducted all interviews during February and March 2003 in Johannesburg.

Responses have not been attributed to individual banks but rather collectively within two groups: Foreign banks (13) and Domestic banks (9). Included within the Domestic bank group are the Big Four banks (ABSA, FirstRand Bank, Nedcor and Standard) and, on occa-sion, their results are shown alongside the overall Domestic bank group.

At times, individual banks declined to answer particular questions or were unable to pro-vide suffi ciently accurate data. This is noted where applicable.

The time commitment and support by all banks in this survey was outstanding. Once again they provided interpretation and direction on how South African banking will unfold over the next three years.


Bank groups

Bank groupsThe information provided has been con-sidered proprietary and remains confi den-tial. Results are therefore presented in a “disguised” group format, in the form of Foreign or Domestic banks. The members of the bank groups are as follows:

• Domestic banks: ABSA Bank

African Bank

FirstRand Bank

Gensec Bank

Investec Bank

Mercantile Bank

Nedcor Bank

Sasfi n Bank

The Standard Bank of South Africa

• Big Four banks: ABSA Bank

FirstRand Bank

Nedcor Bank


• Foreign banks: ABN AMRO Bank NV

Barclays Bank Plc

Citibank NA

Commerzbank AG

Crédit Agricole Indosuez

Deutsche Bank AG

Dresdner Bank AG

HSBC Equator Bank

JP Morgan Chase Bank

RBC Financial

State Bank of India

The South African Bank of Athens

UBS Warburg

• Foreign banks classifi cation:• Registered branches

ABN AMRO Bank NV

Barclays Bank Plc

Citibank NA

Commerzbank AG

Crédit Agricole Indosuez

Deutsche Bank AG


State Bank of India

• Registered banks – Foreign controlled


• Foreign banks – Representative offi ces

Dresdner Bank AG

HSBC Equator Bank

RBC Financial

UBS Warburg


Participants

Name Position Bank

Domestic banks:Nallie Bosman Group Chief Executive ABSA Bank

Rupert Pardoe Group Executive Director ABSA Bank

Santie Botha Group Executive Director ABSA Bank

Johan de Ridder Strategy and Development Director African Bank

Paul Harris Managing Director FirstRand Bank

Marius Ferreira Managing Director Gensec Bank

Stephen Koseff Managing Director Investec Bank

Johnny Symmonds Managing Director Mercantile Bank

Derek Muller Managing Director Nedcor Bank

Alan Greenstein Managing Director Sasfi n Bank

Jacko Maree Chief Executive Offi cer The Standard Bank of South Africa

Simon Ridley Group Financial Director The Standard Bank of South Africa

Foreign banks:Loet Kniphorst Chief Executive Offi cer ABN AMRO Bank NV

Isaac Takawira Country Managing Director Barclays Bank Plc

Vaughan Heberden Director, Southern Africa Barclays Private Clients

Donna Nemer Oosthuyse Head of Strategic Planning Citibank NA

Gotz Hagemann General Manager Commerzbank AG

Phillippe Pellegrin Chief Executive Offi cer Crédit Agricole Indosuez

Neil Morrison Managing Director Deutsche Bank AG

Dietrich von Stackleburg Country Offi cer Dresdner Bank AG

Richard Adcock Chief Executive Offi cer HSBC Equator

Anne Hemphill Vice President JP Morgan Chase Bank

Peter Boyce Vice President JP Morgan Chase Bank

Hennie Fourie Managing Director GPB RBC Financial

Pratima Ram Chief Executive State Bank of India

Nigel Palmer Managing Director The South African Bank of Athens

Wayne Lawson-Turnbull Managing Director UBS Warburg South Africa


Background comments on participants

Big Four bank group

Tier 1 Assets Tier 1

Big Four Banks World Home Background Comments ** Ranking Country *The Banker, July 2002 Ranking*

ABSA Bank

33,500 employees

309 258 NA The group was formed in 1991 with the merger of Allied Bank, TrustBank, United Bank and Volkskas Bank. Although the losses at microlending subsidiary UniFer impacted on Absa’s earnings, the strong performance by its core banking operation positioned the Group for sustainable growth going forward. (Annual Report 2002)

FirstRand Bank

34,000 employees

254 243 NA FirstRand was created in April 1998 through the merger of the fi nancial service interests of Anglo American Corporation (“AAC”) and RMB Holdings (“RMBH”). The major companies involved at the time were the listed entities, First National Bank Holdings of Southern Africa Limited and Southern Life Association Limited, which were controlled by AAC and Momentum Life Assurers Limited, the holding company of Discovery Health and Rand Merchant Bank, which were controlled by RMBH.

Nedcor Bank

18,500 employees

265 312 NA Despite a challenging industry environment, banking group Nedcor Ltd delivered solid core growth for the year to 31 December 2002, a year which also saw it merge with BoE Ltd to become South Africa’s largest banking group by domestic assets. (Company website)


27,240 employees

159 187 NA Standard Bank Group’s holding company is Standard Bank Group Limited. The group delivers its services through more than 600 points of representation throughout South Africa. It was the fi rst South African banking institution to be rated by IBCA, the leading international bank credit rating agency.

** The background comments were taken from the respective banks websites in April 2003


Domestic bank group


Other Domestic World Home Background Comments ** Banks Ranking Country *The Banker, July 2002 Ranking*

African Bank

2,500 employees

NA NA NA African Bank is a wholly-owned subsidiary of ABIL. African Bank specialises in the provision of liquidity through credit to emerging market clients in South Africa.

In 2002 African Bank purchased the Saambou Bank personal loan book for R1.25bn.

Gensec Bank

279 employees

NA NA NA Gensec Bank is an investment bank, wholly owned by Sanlam, specialising as a wholesale provider of derivative-based risk management products to the savings industry. It is also an arranger of debt and equity fi nance for corporates and is a manager of private equity funds. Through its proprietary trading desk the bank acts as a market maker in most South African fi nancial instruments.

Investec

2,800 employees

255 213 NA Since inception as a small fi nance company in 1974, the development of Investec has followed a carefully charted course.

Investec’s banking operations focus on four key areas: Investment Banking, Treasury and Specialised Finance, Private Client Activities and Asset Management.

Mercantile Bank

450 employees

125 117 NA Mercantile Bank Limited provides a full range of foreign and domestic banking, custodial and securities services. It operates in selected retail, commercial, corporate and alliance banking niches to which it offers banking, fi nancial and investment services.

In 2002 Caixa Geral de Depósitos S.A of Portugal announced that they would assume control of the group.

Sasfi n Bank

400 employees

NA NA NA Established in 1951, and listed on the JSE in 1987, Sasfi n Holdings Limited is a bank-controlling company. The Sasfi n Group provides a modular range of banking products and fi nancial services focused on the needs of corporate, commercial and private clients.


Foreign bank group

ABN AMRO

76 employees

22 14 1 ABN AMRO is a prominent international bank, its origins going back to 1824. ABN AMRO ranks 10th in Europe and 22nd in the world based on tier 1 capital, with over 3,400 branches in more than 60 countries, a staff of 110,000 employees and total assets of EUR 556 billion (as per end December 2002).

Barclays Bank

132 employees

20 17 4 Barclays is a UK-based fi nancial services group engaged primarily in banking, invest-ment banking and investment management.

Barclays is one of the largest fi nancial services groups in the UK. It is also a leading provider of coordinated global services to multinational corporations and fi nancial institutions worldwide.Barclays operates in over 60 countries with over 74,700 employees.

Citibank

450 employees

1 2 1 Citigroup is the fi rst fi nancial services company in the U.S. to bring together banking, insurance, and investments under one umbrella. It cumulates the most diverse array of products with the greatest distribu-tion capacity of any fi nancial fi rm in the world.

Citigroup has 270,000 employees manag-ing 200 million customer accounts across six continents in more than 100 countries.

Credit Agricole Indosuez

70 employees

7 18 1 Crédit Agricole is France’s number one bank with over 16 million customers.

The Crédit Agricole Group’s organisation is based on a three-tiered structure: the 2,666 local Banks come together in 45 Regional Banks, which hold, through a controlling holding company, 73 % of the capital of Crédit Agricole S.A., the central body and Central Bank for the Group.


Foreign Banks World Home Background Comments ** Ranking Country *The Banker, July 2002 Ranking*


Foreign bank group

Commerzbank

54 employees

40 22 3 With consolidated total assets of over EUR 420 billion, Commerzbank, based in Frankfurt and founded in 1870, is one of Germany’s leading private-sector banks. Some 37,000 employees, including 7,600 abroad, serve roughly 6 million customers. In Germany, Commerzbank’s operations include a nationwide network of over 700 branches.

Deutsche Bank

210 employees

12 4 1 Deutsche Bank has approximately 77,400 employees and serves more than 12 million customers in 75 countries worldwide. More than half of the bank´s staff work outside of Germany.

Dresdner Bank

8 employees

43 21 4 With around 1,100 branch offi ces and more than 47,000 employees, the Dresdner Bank Group is active in over 60 different countries. In terms of assets, market value and the number of customers, Dresdner Bank is one of the leading banking groups in Europe. Since July 2001, Dresdner Bank has been part of the Allianz Group.

HSBC

318 employees

5 8 1 Headquartered in London, HSBC Holdings plc is one of the largest banking and fi nancial services organisations in the world. HSBC’s international network comprises over 8,000 offi ces in 80 countries.

HSBC Equator was founded in 1975 as a merchant bank to pursue trade fi nance opportunities exclusively in sub-Saharan Africa.


147 employees

4 9 3 The merger of The Chase Manhattan Corporation and J.P. Morgan & Co. was completed on December 31, 2000. J.P. Morgan Chase & Co. is a leading global fi nancial services fi rm with operations in more than 50 countries. JP Morgan Chase is headquartered in New York. The fi rm has relationships with over 99% of the Fortune 1000 companies and serves more than 30 million consumer customers.




Foreign bank group

RBC Financial

6 employees

47 48 3 Royal Bank of Canada serves more than 12 million personal, business and public sector clients worldwide from offi ces in more than 30 countries.

The bank and its subsidiaries have 59,549 employees on a full-time equivalent basis worldwide. RBC Banking delivers services through approximately 1,117 branches in Canada, 245 in the U.S. (through RBC Centura), and 43 in the Caribbean.

State Bank of India

12 employees

136 105 1 SBI is India’s largest commercial bank. SBI has 51 international operations spread over 30 countries.


200 employees

172 137 1 Bank of Athens is owned by National Bank of Greece. NBG operates in Europe, the Balkans, USA, Canada and Australia. The total assets of NBG exceeded EUR 52 billion at 31 December 2001, with shareholders equity of EUR 2.6 billion.

From its head offi ce in Johannesburg and 15 branches in Gauteng, Western Cape and KwaZulu-Natal, Bank of Athens serves its clientele as a fully-fl edged, registered, commercial and clearing bank.

UBS Warburg

93 employees

21 6 1 UBS is a leading provider of private banking services and one of the largest asset managers globally. In the investment banking and securities business, UBS is among the leading global investment houses.

In Switzerland, UBS is the clear market leader in retail and corporate banking.




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A paper entitled ‘Simplify to Succeed’ produced by PricewaterhouseCoopers’ former consulting practice PwC Consulting, described the practical steps that fi nancial institutions need to take to succeed in tomorrow’s retail fi nancial services sector. Background to this paper has been included in a separate section. This Appendix provides a more detailed description of the ten priority actions described in that section.

Rapidly migrate to a customer segment model for the customer-facing parts of your business

• Recognise that the purpose of distribution is to maximise the lifetime value of every customer relationship rather than strive for product economies of scale.

• Identify customer segments that have good growth prospects, and realign management responsibility accordingly.

• Begin with the customer segment that promises the greatest economic value.

• Make investments in technology and processes to ensure the success of the customer segment model, especially in the high-volume parts of the business.

• A multi-stage approach is critical to success. Use the economic value released from small initial investments to fund further initiatives. Achieving the single operational view of the customer at all touchpoints and in real time is a requirement.

• Be aware that the migration may result in the loss of customers in the short term, unless executed fl awlessly. This risk will be outweighed by the long-term benefi ts of a more focused relationship.

Build and reward loyalty to extract the fullest value from the customer

The key to unlocking the full value of the customer lies in developing the relationship rather than seeking quick sales.

• Tailor products, services, pricing and channels to each customer’s lifestyle. To do this, create a complete view of the customer across the enterprise and bring it to bear at all touchpoints. Launch a programme to systematically clean up and consolidate data. In doing so, ensure everyone understands data protection regulations.

• Realise that customer service is an under-explored competitive dynamic, and will be key to strengthening customer loyalty.

• Move from the traditional pricing model based on product/service to one based on the customer or household to strengthen customer loyalty. Reward customers for consolidating their relationship. This can be done through superior price points, improved and personalised service levels, or loyalty reward and point schemes.

• Train customers to use the most appropriate channel to handle each of their needs. This involves putting high touch ahead of high tech to proactively infl uence and reinforce customer behaviour.

Simplify to Succeed – Priority actions

Simplify to succeed

Priority actions


• Start adding value now, based on the entire customer relationship, as margins will start to disappear.

Make Customer Relationship Management a long-term philosophy

Active customer relationship management is the key to generating long-term customer value. But this requires a conscious move away from the traditional sales and marketing mentality.

• Anticipate that your programme will last two to three years. CRM implementation is part of a major change programme that requires changes to processes, performance measures, organisational structures and technology.

• Create a learning organisation.

• Improve sales skills at all customer touchpoints to encourage more proactive handling of data and customers.

• Encourage a sales mentality at branch level and make sure that staff employ customer value.

• Address the structural, reward mechanisms and performance metrics to avoid investments in technology that do not deliver shareholder value.

Broaden the range of products and services to embrace the entire spectrum of customer needs

• Recognise that the game is not just about manufacturing and distributing fi nancial services, but identifying and meeting the full needs of the customer.

• Source some products from other suppliers and/or assemble with those manufactured in-house in order to deliver the full spectrum of products. Note that acquiring the mindset to assemble products and services regardless of where they are manufactured will pose challenges.

• Actively seek partnership and co-branding arrangements to supply additional products. Recognise that in some markets you need to pursue co-branding opportunities aggressively to avoid being locked out by faster-acting rivals.

Explore opportunities to supply products and services outside traditional fi nancial service boundaries

• Provide products and services that deepen customer relationships, without necessarily investing in the manufacture and/or servicing of those products.

• Leverage the insights gained about the customer’s lifestyle and fi nancial needs to offer an increasing range of non-traditional products targeted to address their unique circumstances to strengthen the customer relationship.

• Ensure that extensions into non-traditional products are structured on a variable cost, learn fast, fail early basis.


• Avoid confl ict between brand values.

Learn the skills of product assembly

• Assess the advantages of “white-labelling” versus external product sourcing (own-brand versus established brand). This will differ by market sector and offering.

• Acquire the skills to fi nd appropriate partners and providers. Learn to manage the balance between in-house and externally sourced products.

• Develop standardised features for open products to allow for a wide choice (e.g., for transparent investment “wrapper” products, decide what the basic product features should be, and then go to a range of suppliers for the investment funds).

• Develop customer analytics to select the most appropriate products, fi nancial and non-fi nancial, for each customer. Extend the analytics from verticals like credit cards and life insurance to embrace the entire suite of fi nancial products and services.

Drive component owners to be best in class

• Complete the centralisation and industrialisation of common activities by componentising them.

• Align measures of performance and reward to motivate component owners to maximise revenue and cost effi ciency.

• Strive for best-in-class economics in each component. Recognise that best performance will be achieved in many components by collaborating, co-sourcing and outsourcing.

• Leverage your best-in-class components by exploring the option of fl oating them off. If you do not have best-in-class components, explore options for outsourcing. Defi ne rights, obligations, performance measures and service level agreements at the component level. Changing organisational boundaries before you componentise your business model will create signifi cant problems. Several Financial Institutions are paying the penalty for not fi rst agreeing rights, obligations and service level agreements for components before outsourcing.

• Understand the network dynamics that the CBB model creates when componentising the business model.

• Learn how to manage service level agreements, including interdependency and ownership issues.

Take advantage of wage arbitrage opportunities in lower-cost economies

The migration of commodity activities to lower-cost economies is accelerating and Financial Institutions must aggressively pursue this opportunity to reduce costs.

• Understand local social and employment cultures to ease the transition.


• Consider adjusting onshore employee remuneration to reward skills rather than role.

• Conduct a pilot. If successful, consider migrating a larger process. Success factors and overheads in an offshore facility are different from one onshore.

• Create accountability for the migration offshore through senior management support.

• Migrate personnel who are replaced by offshore service providers to other jobs including the management of the offshore relationship to reduce morale problems.

• Leave some facilities onshore as offshore facilities may pose political risks.

• Exclude processes that might be fully automated or transferred to a self-service process driven by the customer.

Make the culture of operations become more entrepreneurial

• Ensure that quality is not damaged when migrating to the component model by rigorously implementing service level agreements and adopting process improvement tools such as six sigma.

• Appoint managers with entrepreneurial skills as operational component owners. Create career paths that enable such managers to become best in class in their area.

• Monitor service quality unfailingly. Service quality problems can plague poorly managed transformations of operational processes.

• Realign reward mechanisms early on to ensure success both for the component owners and the users of their services.

• Address cultural issues when splitting off components as separate entities.

Ensure your programme has top-level sponsorship and that the sponsors accept that this is a long-term change exercise

• Business and component owners must understand the critical role that technology plays in the migration to the CBB model (Component-Based Business model).

• Recognise that most of the enterprise’s economic value and intellectual capital is locked up in the legacy systems that have been built up over the years. Re-directing these assets to support the CBB model will unlock more economic value than investments in new technology.

• Ruthlessly outsource those parts of the technology infrastructure that are commodity services.

• Develop an end-state architecture for your business and technology as a priority. Advance toward it as economic value is created. Recognise that this is a multi-stage journey. Recognise that emerging technologies have a role to play, particularly inestablishing ‘digital connectivity’ between business components.

• Hold component business unit owners responsible for technology changes. Align


technology resources and component owners to avoid confl ict, and ensure that reward mechanisms for technologists are infl uenced by component owners.

• Do not lose sight of how the technology achieves your business objectives. If you focus only on what new functionality is achieving you will end up with a technology infrastructure that limits the benefi ts of the CBB model.

• Train staff to see the personal value in moving to the new world. For example, new career paths will be created as business units advance from being pure support functions to becoming standalone businesses.

• Design HR policies that encourage team behaviour. The intellectual power of the staff needs to be made a corporate rather than just a personal asset. The fl exibility of the CBB model depends on creating fl exible people.

• Continually communicate the end-state vision and openly reward successes on the journey.

• Implement people development plans and put in place mechanisms to transfer experience from one component to another.

partners insuccess


AboutPricewaterhouseCoopers

PricewaterhouseCoopers (www.pwc.com) is the world’s largest professional services organisation. Drawing on the knowledge and skills of more than 125 000 people in 142 countries, we build relationships by providing services based on quality and integrity. “PricewaterhouseCoopers” refers to the network of member fi rms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. We have a signifi -cant presence in every major market, both established and emerging, which makes the fi rm a global powerhouse with an unmatched ability to serve global, national and local clients.

PricewaterhouseCoopers is the major player in South Africa, and our diverse client base covers the full spectrum of eco-nomic activities. We bring appropriate local

knowledge and experience to bear and use the depth of our resources to bring clients a professional service, specifi cally tailored to meet their requirements. In providing these services we are constantly aware of the importance of our social responsibility to the communities in which we operate, and are committed to the successful implemen-tation thereof throughout the fi rm and in our dealings with clients.

PricewaterhouseCoopers is the leading professional services provider to the world’s top fi nancial services organisations. We have an industry-focused practice dedi-cated exclusively to the banking, invest-ment management, capital markets, private banking/wealth management, mutual fund, insurance and brokerage communities.


The ongoing transformation of the fi nancial services industry, through the key drivers of technology and capital markets, is dramatic and complex. As legal barriers fall between the various components in the industry, the fi nancial services sector is being shaped by megatrends such as convergence, con-solidation and globalisation. Each of these megatrends has a signifi cant impact on the way our clients manage and think about their businesses.

We have the largest specialist fi nancial services practice in Southern Africa, managed by a multidisciplinary team of auditors and tax advisers. Our strategy is to bring signifi cant business advantage to our clients through combining our global multi-disciplinary teams, integrated across-indus-try sectors, geographies and functional skills to bring our global best practices and creative problem-solving to bear.

Our banking practice has taken the lead in presenting signifi cant research on the local banking industry in order to comple-ment our substantial international research projects. The PricewaterhouseCoopers “Foreign Banking in South Africa” surveys done in 1996, 1997 and 1998 have been supplemented in 1999, by our survey, “Investment and Merchant Banking in South Africa”, and in 2000, 2001 and 2002 by “Strategic and Emerging Issues in South African Banking”.

Furthermore, at an international level, research includes two global surveys titled “Tomorrow’s Leading Investment Bank” and the more recently released “Tomorrow’s Leading Retail Bank” which were carried out in cooperation with the Economist’s Intelligence Unit. The fi fth European Private Banking Survey, for 2000/2001 and the second North American Private Banking Survey was published last year.

Other relevant PricewaterhouseCoopers publications include:

• “the Journal” (International publication issued bi-annually)

• “The Financial Services Journal” (South African publication issued bi-annually)

• Global Clearing & Settlement (issued 2003)

• Challenges of the new Basel Accord – actions for senior management (issued 2002)

• Regulatory Compliance: Adding value – a review of future trends

• Being a director – duties and responsibilities of King II (issued 2003)

• Expectations of Bank Supervisors for Guarding against money laundering – a user friendly guide.

• ValueReporting forecast (issued 2001).

We act as auditors to more banks, life insurance companies and short-term insur-ance companies in South Africa than any other professional services fi rm.

Contact:Financial Services Barry Stott +27 11 797 4321Banking Tom Winterboer +27 11 797 5407Life Insurance Herman Wessels +27 21 529 2000Short-Term Insurance John Awbrey +27 11 797 5335Asset Management Pierre de Villiers +27 11 797 5368

Financial Services


Assurance and Business Advisory Services (ABAS)The ABAS service line comprises four core services namely:

AssuranceCentral to our work in this area is the audit or attest function. Our audit work includes statutory and regulatory audit, treasury services and environmental audits. ABAS audits are undertaken with precise service commitments in mind. These com-mitments underpin every aspect of the way in which we manage our audits, enabling us to utilise our resources in the most effi -cient way, to provide an exceptional audit service.

Global Risk Management Solutions (GRMS)Enormous pressures confront management today, and issues such as risk, complexity, and uncertainty defi ne the business envi-ronment. Intense competition, globali-sation, changing customer expectations, workplace pressures, new technologies, regulatory compliance requirements, fi nan-cial volatility, and countless other factors compel organisations to drive, as well as manage change in order to fulfi l share-holder demands for maximum returns and enhanced value.

Organisations worldwide are realis-ing that risk is no longer a liability but, properly managed, a powerful asset that can bestow competitive advantage. At PricewaterhouseCoopers, risk manage-ment services are integrated through our Global Risk Management Solutions (GRMS) division, and our professionals are trained to take an enterprise-wide view of clients’ risks.

The evolution of risk management into complex fi nancial risk models and proc-esses over the past few years has resulted from changing credit, operational and market risk environments. Our Financial Risk Services Division, The Riskhouse, provides consulting services using fi nancial architecture to address these issues faced by our clients.

Our GRMS services, grouped into fi ve subdivisions, are as follows:

Audit and compliance:Regulatory compliance

• Basel II diagnostic procedures and implementation

• Corporate governance

• Compliance offi ce

• Data protection and privacy

• Anti-money laundering

Assurance and quality

• Audit support

• Third party opinions (SAS 70)

• Internal audit

• Due diligence

• Data quality

• Data analysis

• Sarbanes-Oxley

Operational effectiveness:Performance improvement

• Process improvement and reviews

• Sourcing and alliance management

• IT governance/ strategy

• Business continuity planning

• Management information and modeling

• Control process design

• Knowledge management and communication

Services we offer


Project delivery

• Project review and project snapshot

• Change programme and project management

• System implementation support

• Developing change and project management capabilities

Security and technology:• Security strategy and alignment

• Identity management

• Encryption, digital signature and certifi cation services

• Internet security, penetration testing and cybercrime investigation

Sustainability:Corporate social responsibility (CSR)

• Risk review and design of CSR governance

• CSR strategy and policy review & development

• Review, design & development of internal CSR control framework

• CSR assurance and reporting

• CSR training

Risk and value management:• Design, implementation and training in

risk management and value management processes and infrastructure for credit risk, operational risk, market risk and AC 133.

Transaction ServicesPricewaterhouseCoopers Transaction Serv-ices is involved in more deals around the world than any other professional services fi rm. This involvement could be anything from assisting a buyer in price negotia-tions to advising on the most effective tax

structure for a newly acquired business. We serve clients in domestic, cross-border and global transactions.

Transaction Services’ main product is due diligence reviews of varying scope. These reviews are focused to cater for the needs of different stakeholders and to ensure that critical issues are addressed, including uncovering potential fi nancial and strategic risks and rewards, and helping our clients use the due diligence fi ndings to their full advantage during the deal negotiation.

Forensic ServicesForensic Services brings to bear a broad spectrum of accounting and fi nancial analysis techniques to reconstruct the his-tory of a transaction and determine the true facts. Our specialists are expert witnesses accustomed to challenge and seasoned in the presentation of facts in the face of vigorous cross-examination. Products and services include dispute resolution, insur-ance claims services, construction dispute services, IT and legal systems support, intel-lectual property, commercial crime investi-gations, asset recovery, fraud risk manage-ment, anti-money laundering services and business ethics advisory services.Contact: Malcolm Dunn Tel: +27 11 797 4317

Tax and Legal ServicesTaxation is one of the biggest cost items in any business, yet it is one of the most manageable. Using state-of-the-art meth-odologies and technology, coupled with specialist skills, our national team of advis-ers can assist you to control and minimise your tax burden by providing innovative and practical tax and business solutions. Our advice covers all aspects of South African direct and indirect taxes, exchange control regulations and labour law. Through


our extensive network of international offi ces we are also able to provide you with current and specialist advice on structuring your international business operations and investments.Contact: Paul de Chalain Tel: +27 11 797 4280

Corporate FinancePricewaterhouseCoopers’ Corporate Finance practice provides comprehensive fi nancial, economic and strategic advice to companies facing complex business challenges. Our Corporate Finance team has developed a reputation for excellent advice, strong relationships and unique levels of independence. These attributes, coupled with a vast range of experience, have made PricewaterhouseCoopers Cor-porate Finance a key corporate adviser in the South African market. Our position has been reinforced through the completion of key local and cross-border deals.Contact: Pieter van Huyssteen

Tel: +27 11 797 5068

E-businessThe commercial world is being turned upside down. E-business is the biggest opportunity for business since the Industrial Revolution, presenting limitless oppor-tunity and boundless potential. It’s the e-revolution. There’ll be winners, survivors and losers. New leaders will emerge and PricewaterhouseCoopers can help them to do so.

Advances in technology that once took years now occur in months or even weeks. New virtual businesses are created every day, and previously unlikely competitors now vie for market share in places never before possible. E-business is a driving force of this phenomenon, and technology

provides its backbone and infrastructure. At PricewaterhouseCoopers, we have the technological knowledge and business experience to help our clients strengthen and grow their businesses. This will help them to gain the e-business edge in this new information economy. E-business is a common thread that runs through all of our service lines and industry groups, and permeates every aspect of our business. Contact: Doug Franke Tel: +27 11 797 5170


Contacts for Banking Services

Durban

PO Box 1049

Durban

4000

Tel [27](31)250-3700

Fax [27](31)202-8220

Contact: Steve Ashforth

Port Elizabeth

PO Box 27013

Greenacres

6057

Tel [27](41)391-4400

Fax [27](41)391-4500

Contact: Charles Staple

Namibia

Windhoek

PO Box 1571

Windhoek

Tel [264](61)284-1000

Fax [264](61)284-1001

Contact: Dawie Fourie

Swaziland

Mbabane

PO Box 569

Mbabane

Tel [268]404-2861

Fax [268]404-5015

Contact: Paul Lewis

Botswana

Gaborone

PO Box 1453

Gaborone

Tel [267]395-2011

Fax [267]397-3901

Contact: Uttum Corea

Malawi

Blantyre

PO Box 1147/1064

Blantyre

Tel [265]620-322

Fax [265]621-215

Contact: Kevin Carpenter

Zimbabwe

Harare

PO Box 453

Harare

Tel [263](4)307-213-19

Fax [263](4)332-495

Contact: David Scott

Mocambique

Maputo

PO Box 2583

Maputo

Tel [258](1)307-620

Fax [258](1)307-621

Contact: Rob Walker

Southern Africa

South Africa

Johannesburg

Private Bag X36

Sunninghill

2157

Tel [27](11)797-4000

Fax [27](11)797-5819

Contact: Tom Winterboer

Cape Town

PO Box 2799

Cape Town

8000

Tel [27](21)529-2000

Fax [27](21)529-3300

Contact: Hardie Malan

Pretoria

PO Box 1093

Pretoria

0001

Tel [27](12)429-0000

Fax [27](12)429-0100

Contact: Johan Cloete

Strategic and Emerging Issues inSouth African Banking

2003 Edition

Strategic and Emerging Issues in South A

frican Banking 2003 Edition

“The vessel is a symbol of people from many different worlds working together and sharing knowledge. The

shape of each vessel is formed by the classical optical illusion of two facing profiles. Visitors to our worldwide

offices will see vessels crafted in various materials and styles representing the traditions of many cultures. Their

diversity reflects the many worlds in which PricewaterhouseCoopers' people and our clients work together,

share knowledge, solve complex business problems and convert opportunity into success. People, Knowledge

and Worlds are the fundamentals underpinning our organisation.”

Strategic and Emerging Issues in South African …2 Strategic and Emerging Issues in South African...

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