with Brian Kennedy, Group Managing Executive, Nedbank Capital
Taking a look at what has happened at Nedbank in recent years, 2008 jumps out as a year where Nedbank Capital has reshaped its operations to drive growth and to support its expansion into Africa and other international markets. What did this year mean for the bank and how did this new structure benefit you?
When Mike Brown took over in 2008, we started focusing more on the external environment, in particular, Africa. We looked at how we could position Nedbank to grow faster over time. We see that the banking economic profit pools are growing faster in Africa than in South Africa. What we did to effectively position ourselves better is to enterinto a strategic alliance with Ecobank.
In December 2011, we expanded the relationship by entering into a financial transaction with Ecobank as well, lending them USD 285 million, which is convertible into equity over a point in time for up to 20% of the equity. This decision has now given us access to a footprint of 36 countries in Africa. This is a bigger footprint than any other South African institution.
How satisfied are you with how this alliance has taken off?
So far, the alliance has certainly benefitted our South African clients that have wanted to expand and invest in Africa. For the investment bank, the big benefit is that while we see project financing opportunities all over Africa, we do not always know who the people are, or how the project aligns with the local economy. With Ecobank, we now have access to people on the ground who can originate opportunities and help us with understanding who the key players are in the respective jurisdictions.
When Focus Reports met Nedbank CEO Tom Boardman back in 2006, he pointed to the different local contexts for each of the African countries. It would make more sense to look at countries such as Mozambique and Angola because of geographic proximity and the fact that these countries have been ignored by the French banks that dominate the francophone West African countries for example. Can you highlight to our readers what you think are some of the easier markets for South African banks to penetrate today?
Rather than focusing on ease of penetration, I would like to point out that our focus will depend on what growth opportunities we see in the market. Angola is one such market, particularly because of the oil and gas sector there. Nedbank opened a representative office in Luanda about three years ago. The other two key markets in that area are Ghana and Nigeria, the latter primarily also because of oil and gas that will drive all other expansion. In East Africa, Nedbank also opened a representative office in Kenya, which is another focus region for the bank.
Do these growth opportunities outweigh the harsher environment?
You need to learn to deal with the difficult environments. We have taken a longer term view and even though we have now been present in Angola for three years, we have been conducting transactions there for a longer time, particularly for the financing of Sonangol. However, to engage in other transactions you require a presence in the country, which is why the long term view is so important.
You mention that Angola and Nigeria have received particular attention because of the growing oil and gas sectors. Quite recently, Nedbank Capital has also started its own oil and gas unit. Why was this unit necessary and has it changed the way Nedbank Capital is looking at the oil and gas sector?
We have always had sector-focused teams at Nedbank Capital. The strongest and most famous one has traditionally been the Mining & Resources unit, because we sit on a mining economy. This has now moved on to infrastructure, of which renewable energy is a subset. If you combine our sector expertise and our long-term view of Africa that I described earlier, the obvious thing that was missing is Oil & Gas. Because we do not really have such expertise in South Africa, we recruited talent out of London and various international banks. The unit is only about a year old and has probably had the fastest growth and traction compared to any other business unit that we have started up. We are off to a really good start and believe the opportunity lies there.
Did you have some convincing to do vis-à-vis your clients regarding the capabilities you now had to support these projects?
Once we had the team on board, I would not say it was easy, but we experienced fast traction in convincing clients. It was probably a good combination, as the Nedbank franchise is quite well-known on the continent, particularly in mining and infrastructure. While it can sometimes take more than two years to start making a profit with a new business unit, this was fortunately not the issue for us.
Despite the fact that you did not take any of your staff from the mining or infrastructure units, do synergies exist with the Oil & Gas unit?
Both teams are sitting right next to each other and they have some common co-heads. There are certain synergies in the way we look at credits, the way we price deals, etc. Being new recruits from other banks, they had to gain certain insights as to how we operate as an investment bank. These insights were obtained from the mining team.
What made these new staff members leave their respective banks to join Nedbank Capital in South Africa instead?
There is a difference between Africa and Europe at the moment. We are still looking at growth and various opportunities, while these new recruits had been experiencing pullbacks in the industry for various reasons. They want to do deals and have joined an investment bank that can execute and grow the business.
Is this also what drives you?
If you want to be a banker anywhere in the world, South Africa is probably one of the best places. In the World Economic Forum summary, South African banks are ranked at the top. We have a very sound banking system to build on and we are part of Africa, where there is no shortage of projects to become involved in. With our sector teams, we have a big role to play in making these projects happen.
I first started my career in engineering having qualified with a Masters in Electrical Engineering and an MBA. My profession in investment banking began in 1988 with FirstCorp Merchant Bank heading up structured and project finance. I then joined BoE Merchant Bank in 1996, until it was acquired by Nedbank in 2002. I led Capital Markets following the merger and in 2003 was appointed to the Group Executive Committee of Nedbank Group mandated to develop the investment banking franchise, which is now Nedbank Capital. My background in engineering lent itself well to developing sector-focused teams. For oil and gas finance, you need people that understand the oil and gas sector for example.
The fact that we sit on the African continent and that there is so much to be done here, is a key driver of motivation. One should not underestimate the role that bankers – who understand how these things work – have to make a difference. There are going to be big projects in Africa for the next 50 years. The oil and gas sector alone is already lifting the economy and creating additional jobs.
What challenges do you foresee though?
Finding the right bankable projects can be a challenge. Moreover, when it comes to offshore projects, the jurisdictions can be difficult from a sovereign risk point of view.
On the eve of the Cape Town-held Mining INDABA, Nedbank announced plans to potentially double oil and gas lending and offer some US$500 in mining and oil. What potential do you foresee in the sector in the coming years?
Oil and gas will grow faster than our mining business, and will be one of the fastest growing businesses that we have, albeit off a very low base. This is both in terms of revenues as well as balance sheet commitments.
Minister of Energy Dipuo Peters is rather excited to take renewable projects forward in South Africa. Nedbank Capital has already been very involved in showing its support towards these projects. What role do you foresee for Nedbank Capital in this area?
We believe that South Africa needs to play its part in renewable energy and are aware of the fact that the country needs alternate sources of base load power, besides coal. In the first round of renewable energy bids announced during COP17 in 2011, there were 58 bids submitted and 28 awarded by the government. We supported 14 projects in total, of which 11 were among the ones that were awarded, representing 37% of the allocated Megawatt capacity. We thus selected our projects rather well. Round 2 has just gone in, where we expect to see an increased focus on local content, job creation, etc. With our sector focus and our understanding of the technology risk, we think that it is our job to make this happen for the country. Again, this is also an area I see developing across the continent as well, where we currently have started supporting one or two projects already.
You mention you chose the right projects. What defines an attractive project for Nedbank Capital?
The right technology partners, the strength of the sponsor group or equity promoters, the structure of the financial package (debt/equity ratios) and the construction risk are a few such factors. It needs to be a robust and well constructed project.
As the Green Bank, Nedbank has also started the first green index. What does this bring to the industry?
This initiative was launched during COP17. The theory behind this index is that companies with more sustainable business practices outperform non-sustainable companies in terms of stock market ratings over a period of time. We constructed the index of these companies from the Carbon Disclosure Report and back-tested the data over an 18 month timeline.
Participation in the Index can be through the ETF mechanism, which can be bought by any individual investor on the Johannesburg Stock Exchange (JSE). The greater opportunity is to start using this index to create other products in the bank, in terms of life insurance or saving offerings for example. We are busy doing this through the branch network. Anyone in South Africa that is saving in equities now has the opportunity to save in a Green Index, which should also give them outperformance.
How has the market picked up on this new initiative?
The market has picked up and sales have been good, but it is a process that takes time.
Unimaginably, other banks may consider moving into the same direction. How do you see the competitive landscape developing in this regard?
South Africa is an attractive market with strong and competitive players. Any first-mover advantage does not last very long. You always need to remain innovative.
Nedbank CEO Mike Brown stated that, in recent years, Nedbank has focused on recovering from 2003, while today the company should focus more on a “winning approach.” How is this going to reflect on your daily priorities?
The African continent holds a lot of opportunity for growth. Together with our sector-expertise knowledge and our ability to close deals, it is a matter of us going out there and doing business.
Do you have any final message for the international investor community?
South Africa is a country with strong regulatory frameworks in place and as such has withstood the financial crisis well. You will find willing, professional and experienced investment bankers with capital to finance large projects on the continent.