Nedbank, South Africa’s fourth-largest bank by assets,
has come to the end of a comprehensive three-year retail banking
growth plan – and managed to reach its targets. Douglas Blakey
talks to Rob Shuter, managing director of retail banking, about its
numerous business initiatives.

After years of declining market share, Nedbank is starting to find
its feet again in South Africa’s competitive retail banking market.
The country’s fourth-largest banking group by assets, Nedbank
posted strong annual 2007 figures at the end of February: headline
earnings up 33.5 percent to ZAR5.92 billion ($791.3 million), ROE
up from 18.6 percent to 21.4 percent and a reduction in its
cost-income ratio from 58.2 percent to 54.9 percent.

Nedbank’s retail division reported headline earnings up 37.3
percent to ZAR2.01 billion despite what the bank called the “more
challenging credit environment” in South Africa; its credit loss
ratio worsened from 1.1 percent to 1.26 percent.

More significantly, 2007 was the end of a three-year strategic plan
by the bank, initiated after a couple of years of declining market
share.

Implementation of Nedbank’s turnaround programme – devised in three
distinct phases: Fix (2005), Consolidate (2006) and Grow (2007) –
dates back to a set of very poor results in 2003, resulting in a
rights issue in 2004. In particular, the bank had to tackle low
staff morale, client attrition, market share losses and an
ineffective business structure, having, by its own admission, taken
its eye off the ball.

More work to be done

And while Nedbank, a subsidiary of UK-based life insurance and
financial services group Old Mutual, has met the targets set for
2007 of an ROE of 20 percent and a cost-income ratio below 55
percent (compared to a high of over 77 percent in 2004), “much work
still lies ahead,” said Rob Shuter, Nedbank’s managing director of
retail banking, in an interview with RBI.

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“On the retail side, we have been gaining market share in the past
six to 12 months and that is good news for us but it does come
after probably three or four years of fairly consistent declines in
market share so the thing we are most excited about is reversing
the trend. We have been showing some modest gains in the second
half of 2007. In mortgages for example, we are sitting at around 17
percent, which is only about 12 basis points up compared with 12
months ago and for credit cards, we are on around 13 percent
compared with 12 percent a year ago.

“The South African market has become increasingly competitive over
the past 12 to 18 months, with new entrants such as Virgin and a
cards push from Absa’s parent group Barclays. A major relaunch of
Barclaycard did not seem to sell all that well and we have not
really seen any major Barclays influence on the card side.”

Nedbank’s share of total deposits remains flat at around 20 to 21
percent. “It’s one of the few categories where Nedbank has the
strongest market share and we have held our own from a deposits
perspective. We launched quite an innovative product about 18
months ago called Money 24, a three-month fixed deposit account
which offers access to your money with 24 hours notice and it has
been very successful for us.”

A new corporate brand and tag line, ‘Make Things Happen’, was
introduced in 2006 as part of a campaign to increase its marketing
activity, raise brand awareness and position Nedbank as ‘a bank for
all South Africans’. For its retail division, Nedbank was
particularly keen to stem the flow of what it termed primary
account market share loss.

“The one area where Nedbank is strategically challenged is in the
number of primary clients – a Nedbank term we use internally. We
have a formula that we run all of our clients’ transactional
activity through and if they meet a minimum amount of credits and
debits over a three month period we would call them a primary
client. It’s a proxy for a client that would view Nedbank as their
main transactional bank,” he said.

k

A drop in absolute customer numbers

Until recently, Nedbank had been steadily losing not just market
share of primary clients, but even worse, had suffered a drop in
absolute customer numbers in this segment.

“It dipped at 800,000-odd around two years ago and current market
share is in the very low teens. So one of our biggest challenges is
to achieve net growth in primary clients and that is probably the
most dominant theme in the business. We always say that net growth
in primary clients is the best measure of the long term
sustainability of the franchise to attract and retain clients and
so growing primary client numbers is absolutely a big thing for
us,” he said.

A more competitive pricing structure, product innovation coupled
with improved customer service and investment in its distribution
platforms form the basis of Nedbank’s retail fight back.

“I think we have made good progress on pretty much all of those. On
pricing, we regard ourselves as the best in market. We launched the
Ask Once customer Service initiative [see RBI 579] and
have won some service awards. We have been rolling out new branches
and launched mobile banking but what we are finding is that there
is a lot of inertia to clients actually moving their transactional
accounts,” he said.

To give its customer acquisition campaign a boost, Nedbank launched
its Fresh Start promotion in January, with a cash incentive of
ZAR750 for customers who switch their current account to
Nedbank.

“It’s an attempt to tip them over the edge and a wonderful
incentive to start afresh to move to another bank. We went to
market on it early in January and will run it until the end of
March as a first burst and it is a very simple proposition,” he
said.

“In 2007 we set a target of 90,000 net new primary clients and we
achieved close to that figure. That target scales up quite
significantly in 2008 and is the main marketing initiative for the
first half of 2008.”

A major part of a branch expansion plan falls under the bank’s
Green Zone concept, which involves banking and insurance products
provided under one roof. It is part of a strategy by the Old Mutual
Group in South Africa to bring about closer cooperation between
insurance specialist Old Mutual and Nedbank.

Shuter said the one-stop-shop branches will be branded as Green
Zones and follow the marketing principle of beneficial clustering,
where brands benefit from being positioned next to one another and
generate greater customer attraction.

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Mobile banking

He is upbeat about the prospects for the bank’s mobile banking
service, set up last year, which offers mass market customers
balance enquiries, account transfers, third-party payments and
pre-pay mobile phone top-ups. In an attempt to boost take-up of the
new mobile banking facility, Nedbank customers are not being
charged to use the service for the first 12 months following its
launch.

While Nedbank has launched a twin assault on the mobile channel,
with both SMS and WAP (Wireless Application Protocol) based
services, Shuter said the one the bank is more excited about is the
SMS mobile network. “It works with any cellphone on any network and
it does not matter whether the subscriber is on a prepaid or
monthly contract. That has appeal to the broader middle and mass
market that do not have a fancy phone or are not used to cellphone
banking.”

Perhaps the biggest single issue in the South Africa retail banking
industry at the moment is banking fees. According to Shuter,
Nedbank has not increased its retail banking fees since 2004, but
admits that they were coming off a high base around this
time.

“On our analysis we would have been generally the most expensive or
close to the most expensive in most of the market segments. So our
challenge has been to secure a differentiated position from a fees
perspective and we have done that through a combination of either
flat fees or fee cuts over the last three years. On average across
the transactional products we have cut around 19 percent over the
last three years,” he said.

Retail banking fees have become a source of controversy in South
Africa in recent years, resulting in last year’s long-running
Competition Commission enquiry into whether bank charges including
ATM fees, interchange and payment cards and access to the national
payment system thwart effective competition for consumers. The
commission was due to announce its findings at the end of last
year, but has delayed.

“Every bank in South Africa is trying to tell a story around fees
and I think everybody is generally weaving it into the marketing
material. Our rivals have been trying to keep their overall fee
increases below inflation for the past few years but we have
probably had the best story to tell because we have been flat or
cutting,” he said.

Ask Once

Shuter also believes that the bank’s recent launch of a customer
service initiative, Ask Once, designed to set a benchmark for
service excellence in South African banking, will improve the
client experience by dealing with client requests more effectively.
As the name suggests, the aim of the programme is to ensure that
Nedbank customers will only have to ask once for a service with the
bank pledging to donate ZAR50 to a Nedbank-approved charity every
time it breaks its Ask Once promise.

“In the first four months following its launch in September, we
have had 517 broken promises to the end of the year and have paid
out around ZAR26,000. It would be fair to say from our side that is
much lower than we expected.

“We are trying to get a differentiator story around pricing which
we have had a good go at and in the long run around service. It’s a
difficult thing for peers to respond to because you have taken that
ground and anything watered down will look a little wishy-washy,”
he said.