Month: May 2023

I have decided to put my research into bank failures on hold for a while. Instead, I will share my thoughts on Andre′ de Ruyter’s book “Truth to power”. The publishing world clearly has not been collaborating about the timing of releases of non-fiction books in South Africa. There have been some crackers recently and all released within weeks of each other. Justice Malala’s book “The plot to save South Africa” provided some interesting facts regarding Chris Hani’s assassination back in 1993. The conspiracy theories surrounding this tragic event still circulate today. Michael Cardo’s book “Harry Oppenheimer Diamonds, gold and dynasty” is an enthralling biography. It should be on the reading list of undergraduate economics and politics students in South Africa. I am currently engrossed in Jonny Steinberg’s book “Winnie & Nelson, portrait of a marriage”. Phew, some explosive reveals in there.

De Ruyter’s book surreptitiously slipped into bookstores on 14 May 2023, apparently to avoid any preemptive action to prevent publication thereof. The first couple of chapters of “Truth to power” reminded my the infamous eye surgeon, lots of “I, I and I’s” in there and some curious management lessons. De Ruyter certainly won’t be sharing these management lessons in any of South Africa’s prestigious business schools any time soon – he may be assassinated upon venturing back into the rainbow nation. Page 95 of “Truth to Power” (yes, I purchased a hard copy of the book and did not access any pdf’s online) reveals a forensic investigator’s comment to  De Ruyter in January 2020 “…Congratulations, you are now head of the largest organised crime syndicate in South Africa…”.

De Ruyter reveals a lot about the workings of ANC appointed members of parliament. Mantashe is lambasted for his obsession with coal and all things Russian. Gordhan’s reputation as one of the good guys and corruption busters also takes a serious knock. De Ruyter identified early on in his brief reign that Eskom needed to procure four to six additional gigawatts soon. Mantashe’s response to De Ruyter was “…stay in your lane..” whilst Pravin cautioned Andre′ “…you can’t say these things in public…”. It has become increasingly apparent to literate South Africans that the ANC is all about protecting it own turf at the expense of what may be good for the country. Barbara Creecy, the serving Minister of Environment, Forestry and Fisheries, apparently said to De Ruyter “…this loadshedding has nothing to do with Eskom…its all about politics in the run-up to the internal ANC election…”.

De Ruyter reveals that Mantashe was outflanked by Ramaphosa in July 2022. Ramaphosa had surprisingly lifted the cap on private generation of electricity to 100MW in June 2021. Mantashe remarked in July 2022 that despite lifting the cap on private generation there was not even a sign of 1 MW on the grid. Ramaphosa apparently immediately responded that perhaps the cap should then be lifted entirely. Mantashe is reportedly an enigma amongst foreign politicians and financiers. Eskom had managed to raise ±US$10 billion in climate financing deals during De Ruyter’s tenure despite the ANC’s forked tongues. “…Mantashe had a scathing interaction with a senior German minister, who made it clear that if South Africa was not prepared to play ball, the funding would be withdrawn. Bullying tactics aren’t a great way to persuade people to do business with South Africa. Privately, the funders expressed their cognitive dissonance to me, especially energy minster’s palpable hostility towards decarbonization. It was clear that government was suffering from what Aristotle called akrasia: the unerring propensity to always make the worst possible decision…”.

De Ruyter is pro renewable energy. He makes it clear that one of the reasons he took the Eskom head honcho position was to reduce South Africa’s dependence on coal. He makes strong statements such as “…The notion that we can release in the space of 250 years the carbon that has been trapped in fossil fuels over millennia, without it having any impact on our environment, surely borders on stupidity. The science is incontrovertible. Climate change caused by carbon emissions is a fact…”. Phew, the last time I heard such emphatic statements was during Covid-19 lockdowns exhorting us mere mortals to follow the science.

De Ruyter touches on something I have often pondered upon whilst imbibing the nectar of the gods. “…The intermingling of unions with government just doesn’t work. It can’t work because government can’t act against its own allies. Whoever cooked up that unholy alliance deserves to be locked in a room with Jim and Mabapa (union leaders of NUMSA and NUM respectively) for day or two…”. Interesting thought. A  tripartite alliance between a purported liberation movement, trade unions and communists running a country? Wonder how that ends?

I wonder why De Ruyter decided to publish his recollections of his brief time at Eskom? Was it because of his perceived patriotic duty to wash dirty linen in public? Did big business look for a convenient spokesperson to reveal the rot of the ruling party? I guess motive doesn’t matter now. As they say in Afrikaans “uit, uit, die storie is uit”.

Stay safe out there and keep smiling. Hope is a wondrous thing.

There are banking jitters out there at present. Even Warren Buffett had a few things to say about this to his ±30,000 loyal followers who attended the annual jamboree in Omaha recently. Credit Suisse announced on 19 March 2023 that it was merging with UBS, another Swiss behemoth, in order to avoid potential bankruptcy. Credit Suisse was worth US$45 billion at the end of 2017 and now has declined to a paltry US$3.5 billion. That’s value destruction par excellence. The loss of trust in a bank is usually a fatal occurrence – people do not like the thought that their hard earned or grifted cash is not safe in the bank. This fear is often followed by hasty online withdrawals or lengthy queues at the bank’s door. Credit Suisse had been dogged by many scandals over the past decade, some worthy of a novel or two. Imagine a public spat between the incumbent CEO and the head of the Wealth Management division of a banking group making headlines in the staid world of Swiss banking? Well it came to a head in 2019 and the latter departed for UBS (now, there’s shadenfreude). The CEO of Credit Suisse in his wisdom employed a surveillance firm to spy on the departed executive’s activities and public revelation of this made for some juicy reading.

I have had some professional dealings with banks over the years. I was deployed as a trainee decades ago to be part of the teams auditing two of South Africa’s leading banks. I had no idea what I was doing at the time but I loyally followed the audit programs and tried to appear smart and hard working to my superiors. After completing my articIes, I worked in investment banking for a while, learning a lot and not sleeping much. I later in my career veered into corporate training and inter alia, delivered finance for non-financial management training programs in-house for a major RSA bank. In this programme, I tried to explain personal and business banking in layman’s terms and to induce a love of numbers and all things finance. I hope I succeeded.

Banking is both a simple and complicated business. Simplistically, banks accept deposits (or actually borrow money) and on lend to customers. Banks typically hope that you and I leave our money in current accounts for extended periods, earning no interest, whilst this is lent to credit worthy individuals and corporates at market related interest rates. Sounds simple, banks earn an interest margin by lending money at higher rates than they pay for the privilege of being protectors of savings and surplus cash. Obviously, banking is a far more complicated business than that and involves a significant investment in people, processes and systems to provide critical services to the economy. No doubt they employ artificial intelligence in identifying risks and grey money but let me not digress into ChatGPT et al.

Credit Suisse was founded in 1856 and became a global leading banking group delivering financial solutions and wealth management services to private, corporate and institutional clients. I analysed Credit Suisse’s financial performance over the period 2017 to 2022 per their published annual reports to see whether I could identify any red flags – refer attached Excel file for my workings and analysis.  Credit Suisse analysis (May 2023)

There are a couple of key ratios that pertain to banks:

1. Net interest margin
2. Non-interest revenue to total revenue
3. Credit loss ratio
4. Cost-to-income ratio
5. Return on equity (ROE)

Net interest margin provides an indication of the extent to which banks earn higher rates on their lending than they pay depositors for their capital. Credit Suisse’s net interest margin was between 1.6% and 1.7% until the wheels came off in 2021. Crudely, that means that Credit Suisse was earning 1.6%/1.7% more interest on its loans to customers than it was paying to depositors. (Note to self – please update analysis of Capitec and ascertain what their net interest margins have been. Also check what happened at SA Taxi Finance aka Transaction Capital)

Non-interest revenue to total revenue refers to the percentage of total revenue that a bank earns from providing services as opposed to lending activities. Banks earn non-interest revenue from multiple sources from monthly banking fees to ATM withdrawal fees to advice fees. Credit Suisse’s non-lending activities represented 74% of total income in 2021, which in my opinion is a warning sign. Non-interest revenue is welcomed but if it is too high it may be a sign of volatile earnings. Lending revenues tend to be stable over time but non-lending revenue can vary depending on economic conditions. For example, customers may be reluctant to purchase new vehicles when economic conditions deteriorate and hence, fees earned from such new financing activities may decline. Existing vehicle finance loans may not grow but existing loans will still bear interest.

The credit loss ratio refers to the % of total loans that a bank expects not to recover in full. Some refer to this as bad debts but do not mention this word in the presence of accountants, who will immediately go off on a spiel about stage 1, 2 and 3 expected credit losses. Sounds like load shedding but quite normal in banking parlance.

Credit Suisse’s credit loss ratios were around 0.1% in 2017, 2018 and 2019 and then increased significantly in 2021. A quick question to ChatGPT and a review of Credit Suisse’s 2021 annual report revealed some reasons for the worsening of the credit loss ratio in 2021. Credit Suisse incurred credit losses (actual and estimated) of ±US$4.8 billion relating to its exposures to Archegos Capital Management. Archegos was a private firm founded by Bill Hwang that invested (speculated?) in shares and derivatives. Credit Suisse lent Archegos money to pursue these capitalistic activities and unfortunately Archegos was not able to beat the market all the time and succumbed to liquidation in 2021. Imagine lending to a ‘hedge fund’ and then losing US$4.8 billion, which represented almost 10% of Credit Suisse’s total shareholders equity? PS Some people were fired post this discovery.

The cost-to-income ratio refers to the percentage that total operating costs (employee costs, IT costs etc.) represent compared to total revenue. There tend to be banking industry benchmarks – in South Africa, cost-to-income ratios of more than 60% are frowned upon. Credit Suisse’s cost-to-income ratio declined from 88% in 2017 to 77% in 2021, all too high in my opinion. Bank’s costs are largely fixed and overheads need to be kept as lean as possible.

The last ratio is ROE, meaning what return is the bank generating for its shareholders? Credit Suisse’s ROE varied between 4.6% and -16.1% prior to is demise. Harley enticing returns for long suffering shareholders.

So, was Credit Suisse’s demise predictable? Their key ratios were a bit off for years but the information in the public domain about management spats and lending to ‘hedge funds’ should have set off alarm bells. There is an infamous saying accredited to Ernest Hemingway, “…how do you go bankrupt? Slowly, slowly and then suddenly…”. Deposits at Credit Suisse declined from CHF393 billion in December 2021 to CHF166 billion in March 2023, a decline of CHF227 billion. Loans to customers remained largely unchanged leaving a funding hole to be plugged. Credit Suisse’s shareholders and lenders were not keen to take this risk and the rest is history.  Au revoir Credit Suisse.

Hope to post soon about Silicon Valley Bank and First Republic Bank who have also gone out of business recently.

Stay warm amidst all this load shedding.