Executive Interview: Iris Dempsey - FNB Corporate
(6 October 2003 - Australia) Australia’s banking community generally knows little about banking in South Africa and vice versa. Yet, there are striking similarities between the two markets. Executive director, FNB Corporate, Iris Dempsey, came to Australia recently on a fact finding mission, during which the "strong correlation" between the respective markets was confirmed.
First National Bank (FNB) is South Africa’s oldest bank and one of the country’s Big Four banks. In 1998, the financial interests of Rand Merchant Bank (RMB), which included shareholding in FNB, and Anglo American were merged to form FirstRand Limited. FNB and RMB now trade as divisions of FirstRand Bank.
Dempsey played an integral role in rebranding and repositioning FNB Corporate in the South African market, and was instrumental in redesigning the relationship and sales model for the brand.
East & Partners executive editor Paul Bartholomew spoke to Dempsey during her visit to Australia.
What initiated your visit to Australia?
We’ve been through a great deal of transitioning in the banking sector in South Africa and have traditionally benchmarked and interfaced very much with the US and UK banking markets. But we’ve been receiving a lot of research material from Australia over recent months and we realised that Australia is dealing with many similar issues that we’re dealing with in South Africa. That sparked a visit to benchmark some of our strategies against some of the strategies that are being used here. I’m glad I came as it’s certainly been a very interesting visit.
How do the respective markets compare?
One thing that has become very clear during my visit is that there is a very strong correlation between the Australian banking market and the South African one. There are some areas where I believe we’re leading in and others where we’re lagging behind Australia, but essentially we’re all struggling with exactly the same kinds of issues. I don’t think it’s fundamentally that different in the US or UK, it’s just that the nature of the banking systems there make the way they deal with their problems slightly different to the way that we would, as they tend to be more globalised in their approach to banking.
A major similarity is that in South Africa we have the Big Four banks (FNB, Absa, Standard and Nedbank) dominating the market and you have your Big Four doing much the same in Australia.
One fundamental difference is that our second tier banks went through quite a bad patch in terms of reputational risk over the past two years, which essentially destroyed our second tier banking system. One went down and the rest folded. We always underestimate the impact of reputational risk on banking but that’s something we’ve become very aware of in South Africa.
In Australia it seems that there is a very strong second tier market and the regional players have a huge advantage over the big local players, not only from a community based banking perspective, but just in terms of scales of efficiencies, turnaround, and the ability to deliver quality of service to a particular community based type of environment. If I was one of the Big Four banks here, I’d be very concerned about them.
What observations have you made during your visit to Australia?
South Africa has had to become incredibly innovative essentially because of our political isolation during the apartheid era when economic sanctions were in place and that innovate approach has become imbued in our banking culture. By comparison, there seems to have been huge complacency in Australia but you seem on the brink of breaking through that which is going to create an incredibly dynamic and innovative financial service environment.
Also, your Big Four local banks don’t seem to have very strong specialisation so they tend to be quite generalist across a spectrum of activities, so when an international bank comes into the market they have a very high level of specialisation in certain activities. Multinationals in Australia are a lot more active so globalisation plays a much bigger role in this market. In South Africa, we’ve had a lot of international banks enter the market and then withdrawing but the markets are smaller there than here.
Another major difference is that local banks in South Africa lock out foreign banks more strongly than your banks have done here. Typically you’d find a couple of your banks facilitating the infrastructural reach for international banks to move beyond their boutique activities into more contractual banking activities, which is interesting that the banking system would want to do that. We took a conscious effort to lock international banks out and I know Canada tried to do the same thing, so we’ve managed to retain our market with the dominance of the local banks rather than the international banks.
Is not following suit a mistake on the part of Australian banks?
I can’t really say whether it is or not, but I do question why you’d want to let a competitor into your market space to that degree. Multinationals I can understand absolutely, but my understanding is that there’s no exclusivity on a foreign bank targeting the exact same market you’re targeting.
One comment we had from one of the local banks was that they weren’t interested in high scale corporate finance mergers and acquisitions because if a major Australian player looks at a substantial deal, they just can’t afford the reputation of failure having used a local bank, which was quite an astounding comment.
In South Africa the client base is exceptionally loyal, which is historical because of the sanctions era when international banks pulled out, so local loyalty is embedded because of the historical experience South Africa has had.
The SME market segment has become a huge area of focus for Australian banks. Is it a similar scenario in South Africa?
From our discussions in this country there is recognition among the major banks of the space that they’ve neglected in the SME and small corporate market. In South Africa we’ve also neglected that market traditionally because it takes too much energy, and we made enough money from the top end. Now the corporate and institutional markets have been squeezed, so are you going to be making your money in the future from those institutional types of environments? No, you have to find new market space so we’re all moving down into this mid-corporate, SME space.
A major difference between our market and yours is that the Australian market is very over banked for that sector. You have the regional players playing there, you have international banks playing there, and your four majors are playing there. I’m not sure how big this sector is but the gut feeling I have is that this is going to be an overbanked scenario.
What have you extrapolated from your Australian experience that you might take back to South Africa?
There are a couple of things. One is that the relationship models here and the emphasis on relationship banking are very strong and we see some really great initiatives there where you’ve got away from the old traditional style of relationship banking and I’ve been very encouraged about that.
The other area I thought was also interesting, and which has also been a debate with us, is speed to market and initiatives around that. Again, just talking to the banks it seems there’s some really great stuff coming down the line. There are very innovative developments taking place here around risk management models and how to facilitate it. Some of the product offerings, where banks are trying to pull that investment banking line down into the mid-corporate market and the ways they’re meeting the challenge of how to do that successfully, are also very impressive.
We’ve taken a bucket full of stuff back from us. There’s probably very little that’s being done here that’s not on our agenda in South Africa. The only difference is the different spheres of emphasis depending where the particular institution is on its life cycle. Quite surprisingly among the big four banks in South Africa, there’s quite a divergence in terms of where their businesses are currently situated, more so than here.
Could this visit to Australia result in any potential alliances further down the track?
There are one or two banks here with a similar profile to ours in terms of the philosophies and cultures of our companies and some of the agenda items. In one or two cases there will definitely be a strengthening of an ongoing learning partnership between us, which is something that I would very much like to cultivate.
The distance is very difficult between our two countries but there are ways and means of getting around that. The two environments are much more compatible than some of the US and even UK markets around the banking sector, so we’ll definitely be building on those partnerships.
What are your hopes and plans for FNB in Australia?
FNB has always been positioned as a niche player in this market, rather like your international banks, and we’ve held our own very successfully. On the corporate side, I would like to see us continue to interface with the banks that we’ve been meeting on my visit, and strengthen those relationships.
We have a certain amount of customers from South African companies that are starting to set up businesses here, in most cases retailers. Although we facilitate that expansion from South Africa, there is definitely a need for them to start integrating into a local banking system for their own development which is something which we’re looking to facilitate. We would look to see where we could get into some mutual arrangements with some of the local banks here, but we have no intention of expanding our business here into anything more drastic than it already is. Our policy has always been to facilitate offshore expansions but we’re certainly not into a bricks and mortar set up.
How much foreign investment in South Africa are you seeing?
We don’t have huge foreign investment at the moment in South Africa but we do estimate a GDP growth in the country of just over three percent so there’s a lot happening, most of it involves repatriation back into South Africa because of the political stability; inflation has come down quite dramatically and the fiscal and monetary policies are exceptionally well managed. We have a very healthy financial state at the moment so that all bodes well for good development going forward. The tax rates have been cut extensively – corporate tax rates in South Africa are currently at 30 percent, while the maximum marginal tax rate has come down steadily over the past few years from 45 percent to 40 percent – and there are plans to bring that down even further, particularly personal and company tax.
There are huge capital expenditure projects taking place in South Africa, particularly in Johannesburg. We were disappointed to not get the Soccer World Cup in 2006 which would have resulted in a lot of new infrastructure.
But there’s plenty of goodwill towards South Africa in the light of where it’s come from and where we’re going. However, we’re still waiting to see actual foreign investment come in. It’s there but it’s not significant but I think that’s a global problem, and consequently investing in South African stocks is definitely not on top of the agenda for many companies.
Since the end of the apartheid era, how successful has the country been in establishing African companies as opposed to European or Afrikaans ones?
We’ve got huge initiatives running in the country around what we call ‘Black Empowerment’ companies and the government has established the black empowerment scorecard and every company has requirements to commit to in terms of that. So we’ve moved away from the concept of affirmative action, which I think is a sign of maturity of the economy and the political state in our country. We’ve now moved to more economically viable strategies which will be more sustainable in the long-term rather than just quota systems.
There’s currently a huge focus around ownership and retention of companies, as before we had the problem of black business people who took equity holdings in companies selling off their stake the minute they could make a profit and take the value, so it ended up turning into a self-enriching program. Now there are certain requirements for ownership.
There is also more of a community focus now and having your workforce representative of the environment you’re operating in, which leads to sustainable business partnerships in the community.
Dempsey played an integral role in rebranding and repositioning FNB Corporate in the South African market, and was instrumental in redesigning the relationship and sales model for the brand.
East & Partners executive editor Paul Bartholomew spoke to Dempsey during her visit to Australia.
What initiated your visit to Australia?
We’ve been through a great deal of transitioning in the banking sector in South Africa and have traditionally benchmarked and interfaced very much with the US and UK banking markets. But we’ve been receiving a lot of research material from Australia over recent months and we realised that Australia is dealing with many similar issues that we’re dealing with in South Africa. That sparked a visit to benchmark some of our strategies against some of the strategies that are being used here. I’m glad I came as it’s certainly been a very interesting visit.
How do the respective markets compare?
One thing that has become very clear during my visit is that there is a very strong correlation between the Australian banking market and the South African one. There are some areas where I believe we’re leading in and others where we’re lagging behind Australia, but essentially we’re all struggling with exactly the same kinds of issues. I don’t think it’s fundamentally that different in the US or UK, it’s just that the nature of the banking systems there make the way they deal with their problems slightly different to the way that we would, as they tend to be more globalised in their approach to banking.
A major similarity is that in South Africa we have the Big Four banks (FNB, Absa, Standard and Nedbank) dominating the market and you have your Big Four doing much the same in Australia.
One fundamental difference is that our second tier banks went through quite a bad patch in terms of reputational risk over the past two years, which essentially destroyed our second tier banking system. One went down and the rest folded. We always underestimate the impact of reputational risk on banking but that’s something we’ve become very aware of in South Africa.
In Australia it seems that there is a very strong second tier market and the regional players have a huge advantage over the big local players, not only from a community based banking perspective, but just in terms of scales of efficiencies, turnaround, and the ability to deliver quality of service to a particular community based type of environment. If I was one of the Big Four banks here, I’d be very concerned about them.
What observations have you made during your visit to Australia?
South Africa has had to become incredibly innovative essentially because of our political isolation during the apartheid era when economic sanctions were in place and that innovate approach has become imbued in our banking culture. By comparison, there seems to have been huge complacency in Australia but you seem on the brink of breaking through that which is going to create an incredibly dynamic and innovative financial service environment.
Also, your Big Four local banks don’t seem to have very strong specialisation so they tend to be quite generalist across a spectrum of activities, so when an international bank comes into the market they have a very high level of specialisation in certain activities. Multinationals in Australia are a lot more active so globalisation plays a much bigger role in this market. In South Africa, we’ve had a lot of international banks enter the market and then withdrawing but the markets are smaller there than here.
Another major difference is that local banks in South Africa lock out foreign banks more strongly than your banks have done here. Typically you’d find a couple of your banks facilitating the infrastructural reach for international banks to move beyond their boutique activities into more contractual banking activities, which is interesting that the banking system would want to do that. We took a conscious effort to lock international banks out and I know Canada tried to do the same thing, so we’ve managed to retain our market with the dominance of the local banks rather than the international banks.
Is not following suit a mistake on the part of Australian banks?
I can’t really say whether it is or not, but I do question why you’d want to let a competitor into your market space to that degree. Multinationals I can understand absolutely, but my understanding is that there’s no exclusivity on a foreign bank targeting the exact same market you’re targeting.
One comment we had from one of the local banks was that they weren’t interested in high scale corporate finance mergers and acquisitions because if a major Australian player looks at a substantial deal, they just can’t afford the reputation of failure having used a local bank, which was quite an astounding comment.
In South Africa the client base is exceptionally loyal, which is historical because of the sanctions era when international banks pulled out, so local loyalty is embedded because of the historical experience South Africa has had.
The SME market segment has become a huge area of focus for Australian banks. Is it a similar scenario in South Africa?
From our discussions in this country there is recognition among the major banks of the space that they’ve neglected in the SME and small corporate market. In South Africa we’ve also neglected that market traditionally because it takes too much energy, and we made enough money from the top end. Now the corporate and institutional markets have been squeezed, so are you going to be making your money in the future from those institutional types of environments? No, you have to find new market space so we’re all moving down into this mid-corporate, SME space.
A major difference between our market and yours is that the Australian market is very over banked for that sector. You have the regional players playing there, you have international banks playing there, and your four majors are playing there. I’m not sure how big this sector is but the gut feeling I have is that this is going to be an overbanked scenario.
What have you extrapolated from your Australian experience that you might take back to South Africa?
There are a couple of things. One is that the relationship models here and the emphasis on relationship banking are very strong and we see some really great initiatives there where you’ve got away from the old traditional style of relationship banking and I’ve been very encouraged about that.
The other area I thought was also interesting, and which has also been a debate with us, is speed to market and initiatives around that. Again, just talking to the banks it seems there’s some really great stuff coming down the line. There are very innovative developments taking place here around risk management models and how to facilitate it. Some of the product offerings, where banks are trying to pull that investment banking line down into the mid-corporate market and the ways they’re meeting the challenge of how to do that successfully, are also very impressive.
We’ve taken a bucket full of stuff back from us. There’s probably very little that’s being done here that’s not on our agenda in South Africa. The only difference is the different spheres of emphasis depending where the particular institution is on its life cycle. Quite surprisingly among the big four banks in South Africa, there’s quite a divergence in terms of where their businesses are currently situated, more so than here.
Could this visit to Australia result in any potential alliances further down the track?
There are one or two banks here with a similar profile to ours in terms of the philosophies and cultures of our companies and some of the agenda items. In one or two cases there will definitely be a strengthening of an ongoing learning partnership between us, which is something that I would very much like to cultivate.
The distance is very difficult between our two countries but there are ways and means of getting around that. The two environments are much more compatible than some of the US and even UK markets around the banking sector, so we’ll definitely be building on those partnerships.
What are your hopes and plans for FNB in Australia?
FNB has always been positioned as a niche player in this market, rather like your international banks, and we’ve held our own very successfully. On the corporate side, I would like to see us continue to interface with the banks that we’ve been meeting on my visit, and strengthen those relationships.
We have a certain amount of customers from South African companies that are starting to set up businesses here, in most cases retailers. Although we facilitate that expansion from South Africa, there is definitely a need for them to start integrating into a local banking system for their own development which is something which we’re looking to facilitate. We would look to see where we could get into some mutual arrangements with some of the local banks here, but we have no intention of expanding our business here into anything more drastic than it already is. Our policy has always been to facilitate offshore expansions but we’re certainly not into a bricks and mortar set up.
How much foreign investment in South Africa are you seeing?
We don’t have huge foreign investment at the moment in South Africa but we do estimate a GDP growth in the country of just over three percent so there’s a lot happening, most of it involves repatriation back into South Africa because of the political stability; inflation has come down quite dramatically and the fiscal and monetary policies are exceptionally well managed. We have a very healthy financial state at the moment so that all bodes well for good development going forward. The tax rates have been cut extensively – corporate tax rates in South Africa are currently at 30 percent, while the maximum marginal tax rate has come down steadily over the past few years from 45 percent to 40 percent – and there are plans to bring that down even further, particularly personal and company tax.
There are huge capital expenditure projects taking place in South Africa, particularly in Johannesburg. We were disappointed to not get the Soccer World Cup in 2006 which would have resulted in a lot of new infrastructure.
But there’s plenty of goodwill towards South Africa in the light of where it’s come from and where we’re going. However, we’re still waiting to see actual foreign investment come in. It’s there but it’s not significant but I think that’s a global problem, and consequently investing in South African stocks is definitely not on top of the agenda for many companies.
Since the end of the apartheid era, how successful has the country been in establishing African companies as opposed to European or Afrikaans ones?
We’ve got huge initiatives running in the country around what we call ‘Black Empowerment’ companies and the government has established the black empowerment scorecard and every company has requirements to commit to in terms of that. So we’ve moved away from the concept of affirmative action, which I think is a sign of maturity of the economy and the political state in our country. We’ve now moved to more economically viable strategies which will be more sustainable in the long-term rather than just quota systems.
There’s currently a huge focus around ownership and retention of companies, as before we had the problem of black business people who took equity holdings in companies selling off their stake the minute they could make a profit and take the value, so it ended up turning into a self-enriching program. Now there are certain requirements for ownership.
There is also more of a community focus now and having your workforce representative of the environment you’re operating in, which leads to sustainable business partnerships in the community.
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