Without a doubt, each time a new competitor comes in, banks have to watch and see what they are doing and how they are able to do something more efficiently than you are, says Intellidex’s senior banks analyst Nolwandle Mthombeni. Featured in Mail and Guardian. 

The idea of control vested in an anonymous structure is diabolical.

This column first appeared in Business Day. 

It is hard to fathom the contempt with which Naspers, and now its alter ego Prosus, treats minority shareholders.

Consider that Naspers is controlled through unlisted A shares that have 69% of the voting power despite having a fraction of the economic interest. Consider too that no-one knows exactly who controls those A shares. Chair and former CEO Koos Bekker and fellow executive Cobus Stofberg control some, Sanlam others, but the holders of the majority are unknown; there are more than 5,000 shareholders via intermediary entities, according to Naspers.

This is, to my mind, the most astounding example of poor governance in any big company in the world. Differential voting right control structures are sometime tolerable when they endow a widely respected founder or other individual with control (for instance Google is controlled by founders Larry Page and Sergey Brin despite having a minority economic interest), but the idea of control vested in an anonymous structure is diabolical.

If this wasn’t bad enough, in 2019 Naspers vastly complicated things by setting up Prosus, listed in Amsterdam, as its holding company for its internet assets (particularly the crown jewel, its 29% interest in Tencent). Prosus had a slightly different share class structure; it too had N and A shares, and they have equal voting rights. But before you conclude that made Prosus less worse than Naspers, built into Prosus’ articles of association is another share class: A2 shares that have 1,000 times the voting rights of the N and A shares. The A shares convert into these A2 shares if Naspers ever loses control of Prosus. This means that the same opaque interests in Naspers also have control of Prosus, even if Naspers’s interest in Prosus falls below half.

The next move in this Byzantine restructuring happened earlier this month when Prosus acquired Naspers shares by issuing Naspers shareholders with Prosus shares (in various classes). Thanks to the control structure, this deal was forced through, despite some vociferous opposition from ordinary shareholders. At the Prosus general meeting to approve the offer, 90% of shareholders there voted for it. But consider that once you take out the Naspers votes (it held 75% of Prosus), almost half of Prosus minorities voted against it. Those minorities include group executives and other related parties — so I think it is safe to say the majority of genuinely independent minorities were opposed. Also, within Naspers, the minorities were given no voice — the A shareholders simply made it happen. But a group of 35 institutional investors in SA wrote a strongly worded letter to the Naspers board to voice their opposition.

The result of all this is that Prosus now owns 49% of Naspers, and Naspers owns 56% of Prosus (though 72% of the voting rights thanks to the creation of a new share class). This structure is purported to be an advance in efforts to unlock the discount to net asset value that Naspers (and now Prosus) have long traded at. The company argues that is partly because Naspers is so large on the JSE that investors are reluctant to buy because of the concentration limits they face. That problem has been substantially lessened by the poor performance of the share price during the period. Naspers is down about 35% since its February highs. That weakness is largely because of regulatory woes in China affecting Tencent, but no doubt Naspers governance high jinks will have lost it market respect.

Minorities made their discomfort clear too in last week’s Naspers AGM; 66% rejected the group’s remuneration policy and its implementation while 85% refused to grant directors the right to issue unissued shares. But how did the all important A shareholders vote? Well, 100% were in favour of every one of the 11 resolutions tabled. So, they all sailed through.

What is really going on here? The answer has a lot to do with the intentions of those A shareholders, which are, of course, hard to discern. It is clearly being driven by the Tencent stake, which despite recent tarnishing is still worth a whopping R2.5-trillion, considerably more than the R1-trillion market capitalisation of Naspers, even though it holds 56% of the company that holds that stake. The obvious thing to do if you want to reduce that discount is to unbundle the Tencent shares, but Naspers directors have steadfastly refused to do so.

Perhaps those A shareholders are wanting to get their hands on that value outside the SA exchange control and tax net. A remarkable feature of all the transactions that have happened is that little tax has arisen requiring payment to the SA Revenue Service. The end game may be for A shareholders to flip completely into Prosus, offshoring their assets. At that point, the Tencent interest can be unbundled with minimal tax consequences.

The route there is complex. But a crazy cross-shareholding structure may be a good step in the process of one day convincing regulators (including the SA Reserve Bank and National Treasury) to simply allow Prosus to complete a reverse takeover of Naspers. Watch this space.

• Theobald is chair of research-led consulting company Intellidex

 

The Land Bank’s turnaround plan is positive but depends on the fast-tracking of a pledged R7bn government bailout, says Peter Attard Montalto, director at Intellidex. Creditors have been deeply frustrated by the entire process in being offered unworkable solutions at every step. We should have been here a year ago already.

Featured in News24. 

The business environment remains risky, volatile, and uncertain. Across all the banks, there has been limited corporate borrowing, says Nolwandle Mthombeni, senior banking analyst with Intellidex. This is not necessarily a sign of trouble – given that credit loss ratios are improving – but signals a lack of opportunity or lack of confidence, she says. Featured in Daily Maverick.

We’ve only taken the first step towards energy reform, but it is a big step and we are now in a totally different era for the electricity supply industry.

This column is was first published in Business Day.

I am feeling greedy. In  the past two weeks we have got not one but two Electricity Regulation Act (ERA) Schedule 2 amendments gazetted.

While awkward for the department of mineral resources & energy — and we can moan about the language and fudge of the first version — we should recognise that in the end, thanks to unstoppable reformist forces overcoming (seemingly) immovable ministerial obstacles, we are in a totally different era for the electricity supply industry now.

For the first time in a long time we are going to see the private sector being allowed to solve SA’s problems of energy security and cost of supply, through deciding its own projects, getting its own funding, and doing all this in a jobs-maximising way that can establish sustainable pipelines of demand that create sustainable localisation opportunities that actually work, unlike the dictat command-and-control views emanating from the department of trade, industry & competition.

The amount of resistance that reformists got to such a step shouldn’t be forgotten. The piles of evidence that were required and nonsensical arguments that had to be rebutted in the past year are testament to a lack of imagination in energy policy-making  that is not fit for the future and does not provide for the agile change needed to address the scale of the Just Energy Transition and the role of Eskom within that. The fact that our comrades in Cosatu got it first is still amusing.

This introspection is required because SA has a habit of seal-clapping successes and making them seem like they were easy. We are only taking the first (albeit big) step here in energy reform. This is the beginning, not the end.

The next steps on other reform fronts such as water and visas are deeply challenging and complex, though progress is being made with the water issue. With something like spectrum, change may be impossible in any reasonable amount of time.

The emerging contrasts between policymakers who “get it” and those who don’t is stark and will continue to be problematic in the economic cluster after the reshuffle. Such divides were acutely seen at the end of last month at the Presidential Climate Commission as ministers contradicted each other — some were pragmatic, others off-piste. The split between minister Pravin Gordhan on the positive side and deputy minister David Masondo on the bizarre side, and between minister Barbara Creecy on the positive and minister Gwede Mantashe stuck in the mud, was glaringly obvious.

This matters because dealing with the implications and consequences of the ERA amendment, let alone with the wider  Just Energy Transition, is highly complex and cuts across departments. The Presidential Climate Commission is thankfully, strategically, at least starting to box in and paint out guide rails for where the bounds of rationality are in the policy response as we approach COP26.

The great irony of course is that these types of reforms — which the Left seems to show disinterest in — are exactly what is going to expand the tax base over time, and sustainably.

It is crucial to bear this in mind as the arguments rage over the social security green paper and the madcap and unworkable, unaffordable vision it lays out.

There seems to be a view floating out in the echo chamber that is Twitter that somehow “financial” economists are against everything.

Nothing could be further from the truth. I want a more generous wider social wage — broadly conceived, including health, education, income and employment support, and as fast as possible.

Maybe “financial” economists are forced to think in general equilibrium terms, to include the money and financial sectors in their modelling and analysis given that these are our daily bread and butter, in a way others need not and can miss out of their models. Maybe we are acutely aware of corporates and how they function and make decisions on investments and employment, which make up the largest portion of economic activity (not the public sector).

The point is not the provision of support — there can always be discussions about design and incentives — but the affordability of it, how it interplays with revenue and debt-funding constraints and the balance of risk, particularly with a nod to behavioural effects.

While I wouldn’t presume to speak on behalf of my fellow “financial” economists, I think many of them share this view or something akin to it. In other words, this is about choosing between options and seeing trade-offs. It’s not a magic tax that can solve all problems.

Reforms over time will generate the revenue to sustainably finance a higher social wage, but taxing the middle classes significantly more is certainly not the way to go about it. Cosatu, again a beacon of rationality, has forcefully pointed this out.

People say this is unfair. But to frame it in terms of fairness is to suppose you have two viable choices to choose between. That is not the case. The unfairness is at root the lack of growth-boosting reforms since 2009, the lost years of state capture and the conflicting policy motivations now seen from some ministers. This is what creates the unfortunate choice between a step by step approach and a big bang.

But this is all the more reason to push labour-intensive growth reforms faster to expand tax revenues, reduce unemployment and afford a proper sustainable social wage.

Attard Montalto is head of capital markets research at Intellidex, an SA research-led consulting company.

Changes to schedule 2 of the Electricity Regulation Act are significant and can spur substantial investment. Intellidex believes that even on a narrow reading, the regulation can still unlock significant investment in the order of 10GW in the coming seven years, though we must be cautious that it will take around two years for the first energy to arrive and so we still face a significant period of load shedding. Featured in Business Day.  

Once upon a time, banks could make up their earnings. Well, not quite, but bankers had a lot of discretion.

This column was first published in Business Day. 

Once upon a time, banks could make up their earnings. Well, not quite, but bankers had a lot of discretion. With banks’ earnings season now upon us, it is tempting to reminisce. For various reasons, discretion has made something of a comeback.

There are many studies that show banks engaged in earnings smoothing. This was the practice of managing just when a bank would recognise losses or gains to keep earnings and dividends growing steadily year after year. That was thought (and probably did) build confidence among shareholders and depositors alike.

One academic study on SA showed that banks tended to smooth earnings when they were undercapitalised. Globally there are standout examples such as the 1987 case of Citicorp, then the largest bank in America, which dramatically increased its loan loss provisions by $3bn in 1987 so that it could achieve its earnings target in 1988. Here, smoothing was much more subtle.

There are several ways banks did it — loan provisioning was the most obvious, with banks’ managers determining that more should be put aside for bad loans in good years, so that less could be put aside in bad years, keeping credit costs smooth. The use of derivatives was another way to do it, with banks using flexibility on how and when to recognise gains and losses on interest rate and exchange rate hedges.

The impact of this practice ranged from benign to outright shams. The benign reading was that bank managers have the best insight into the performance of their business, so giving them discretion to manage their reported earnings over time leads to good outcomes for shareholders, who want a nice smooth earnings and dividends profile after all.

The sham reading was that managers are rewarded on the short-term performance of the business, and discretion just meant ramping up earnings so they can book bonuses. The latter reading became more prevalent in the 1990s as performance-based remuneration, in which managers made most of their money from short-term outcomes, became dominant. The rise of modern portfolio management also led to demands that financial accounts be completely transparent to leave it up to investors how to respond to bank performance.

The accounting regulators moved in. IAS 39 (International Accounting Standards) was the first strike in 2003 (hitting SA a year later), which forced bankers to provide for loan losses based on “objective” evidence, largely the historic performance of loans. This was, however, only backward looking. When the global financial crisis hit, we realised with a shock that it wasn’t such a good idea for banks to be provisioning by only looking in the rear-view mirror. That left them free to take huge risks on instruments that may have poor performance in the future but allowed them to book growth now.

And so, we came to a new standard: IFRS9 (International Financial Reporting Standard) which came into being in 2018. This requires bankers to book loan loss provisions on a forward-looking basis, so they must anticipate what the likely losses on loans will be and take a cost up front for this.

But the Covid-19 crisis showed up a problem with this: it is hugely procyclical. When the crisis broke, banks had to take large losses immediately to reflect the obvious deterioration in the credit outlook. That had the potential to impair capital which meant banks’ risk appetite plummeted, further weakening the outlook.

Banks and their regulators have been on a careful dance since. Following international precedent, the SA Reserve Bank last year told banks to go easy on provisioning for loans that they had to restructure for clients affected by lockdowns.

Lockdowns, the Bank said, were not a change in fundamental creditworthiness, but just an interregnum, and therefore banks didn’t have to throw the kitchen sink at their provisions.

But banks also faced a problem in that even their forward-looking models weren’t equipped to deal with the economic shock represented by Covid-19. These models still rested on historic data to guide expectations about the future. So, the concept of “judgmental overlays” was introduced, which saw banks putting aside billions in additional provisions last year to cover the bleak outlook that wasn’t quite being captured by the models. Management discretion was back.

Fast forward a year and we can test how good these predictions were. Large global banks have been reporting an enormous jump in profits, largely because the judgmental overlays they took have turned out to be too conservative. So that means they can write those costs back into the profit line and report enormous growth.

Locally, the focus is on how restructured loans are doing, as well as how those judgmental overlays are looking in retrospect. My view is that the restructured loans were underprovided, but the judgmental overlays were probably overdone.

Banks won’t want to look too profitable — there is going to be a big year-on-year jump in profits anyway — so the judgmental overlays won’t be released yet. They will be banked for when things have calmed down and the income statement can do with some support. We’ve gone back to the future.

Theobald is chair of research-led consulting firm Intellidex.

Technically former finance minister Tito Mboweni may well have resigned but the political machinations and motivations are key. He likely has been forced out by the SACP and Cosatu with President Cyril Ramaphosa’s nod, says Intellidex’s Peter Attard Montalto. Featured in Business Report.

While Bank Zero has got off to a late start given delays mainly related to the pandemic, it is joining the market in time to take advantage of a push by the government and private sector to shore up small- and medium-sized businesses, says Intellidex’s Nolwandle Mthombeni. Featured in Bloomberg. 

With bank results season upon us, Intellidex senior banks analyst Nolwandle Mthombeni weighed in on what we are likely to see. She says that dividend payouts will likely be in line with each bank’s dividend cover policy. This means despite the level of earnings recovery, they are unlikely to make up for the lack of dividends in 2020 by paying out more this year.

Featured in News 24.

Looking back at the cabinet reshuffle, all we see is a range of sub-par ministers who’ve been shuffled from one portfolio to another due to a lack of better options.

This column was first published in Business Day. 

SA loves a reshuffle. I probably got more WhatsApps from clients, journalists, ANC watchers and party insiders in the past two weeks than in the previous few months combined.

There was certainly drama in the end, but when zooming out it is clear there was a significant lack of choice in several senses — something people seemed to forget. With only two non-MPs to choose from (and one with Ebrahim Patel still stuck in his portfolio), MPs were the only real choice.

When we stand back from this reshuffle we see the broad status quo: a range of sub-par ministers who have been shuffled from one portfolio to another due to a lack of better options.

We also get clear signals of the balance of importance the president puts on politics (whether provincial or internal party) versus policy and reform. This is seen in several places such as the departments of mineral resources & energy and police, where the ministers have remained in place for political reasons despite the clear need for change in both.

There were improvements. Undoubtedly, Thandi Modise in defence will be a force to reckon with for any lazy general compared with her confused predecessor.

Yet there were also complicated outcomes. Replacing Senzo Mchunu with Ayanda Dlodlo at public works & administration is a potentially serious error for  the department that may do more in the long run for fiscal risk downsides — from the public sector wage bill and structural reform upsides from the agenda Mchunu started for deeper capacitation of the public sector. That said, putting him at water is very interesting — this is a hugely important ministry for SA’s climate resilience, a (quiet) ongoing success for Operation Vulindlela reforms going on in the background and, in future, the source of huge public sector investment to come.

Some moves provide relief, such as removing Stella Ndabeni-Abrahams from a messy tenure at communications. Yet she has now been imposed on small business development, which is potentially crucial for recovery from the unrest.  She is replaced by Khumbudzo Ntshavheni, a close trusted aide of Ramaphosa, yet what is that status meant to achieve? Resolving the spectrum issue is now about a complex unpicking of a legal mess created by the Independent Communications Authority of SA (Icasa), something the minister can ultimately do little about.

There was much relief with the reshuffle as the tension was building up in the commentariat, media and inside the ANC. But with the bar set far too frustratingly low, are the right people in the right roles to lift potential growth? No. Were the best available people in SA brought in? No. Was that possible? No, not under the current political rules. Were the best people possible within the rules deployed in the right roles? Hmmm. That is a hard question to answer. Maybe, though probably not. This is where the bar ends up on the floor — the tyranny of low expectations.

One day in future we will be in a place where whoever the minister is doesn’t particularly matter — corrupt minister, incompetent minister, investor-uncertainty stoking minister — because a decent director-general and civil servant team in each department would be a bulwark against the crazy merry-go-round. We are, however,  definitely not there in almost all departments. As such, who the minister is matters.

There is a paradox. The ANC says it doesn’t matter who is deployed. They are just there as humble servant cadres of the movement. Anyone who is there would (under instruction of and with oversight of the party) do the same thing. Yet this is, if I am being polite, a myth.  The personality of a minister sets pace and expectations. Either they are good at managing downwards and holding their department to account on an agenda — that they set in specific terms from the generalities of the ANC — or they are not.

Very few departments have the capacity, the history and the embedded institutional memory to shape their ministers. The National Treasury is probably the only real example.

This is where we are about to see an interesting tug of war.

Enoch Godongwana is an unusual incoming finance minister. Never before has a minister been so open for so long with investors and business — having come from the role of ANC salesman-in-chief to financial stakeholders (and economic transformation committee head). It is all here in the media record and in the notes and reports of investors: the positive views on coal, quantitative easing and industrial interventionism, but also the fiscal conservatism, backing of Operation Vulindlela and belief in the power and supremacy of the Treasury. He is notionally to the left of Mboweni but our King of Lucky Star was an outlier. Godongwana is still well towards the conservative end of the ANC spectrum. Yet he is somewhat to the left of National Treasury, and herein the battles inside Treasury will be interesting to watch.

The Treasury has seen a flight of human capital — to the Reserve Bank and elsewhere — in recent years and needs continual work to strengthen its intellectual battlements. The Treasury arm of Operation Vulindlela has shown what is still possible from the tower in Pretoria. But many new and complex battles are coming, including post-unrest policy and a basic income grant in particular. The Treasury needs to be battling these, in particular battling against the so-called inevitability of a basic income grant and other “obvious” but dangerous policies that are coming down the line.

The status quo at the Treasury is not enough though. It needs to quickly up its game and realise the opportunities for crowding in new climate funding on a massive scale for Eskom’s benefit, rather than being a passive regulator of Eskom’s funding activity. It needs a green-bond curve.  It cannot stand still.

Continually rebuilding the institution of the Treasury to make it fit for the future is therefore the ultimate task Godongwana will face, in addition to holding the fiscal line and the state-owned company line.

Overall, the drama of the reshuffle will eventually subside (after there is wider realisation that Mboweni was pushed rather than jumped). Will we feel like the narrative has been reshuffled somewhere new and exciting, or that this is still just the status quo?

A larger choice of ministers will be available after the elective conference at the end of 2022 and then the elections of 2024. That is a rather long time to wait, however, for the ministerial leadership to solve something like an unemployment crisis, an inequality crisis or an energy crisis.

Attard Montalto is head of capital markets research at Intellidex, an SA research-led consulting company.

 

Intellidex research  in May found that government’s 20% substitution target was probably not realistic, even though businesses overall were positive about the potential for localisation. Featured in Daily Maverick. 

Last night President Cyril Ramaphosa reshuffled his cabinet which brought in the head of the ANC’s economic transformation committee, Enoch Godongwana, as South Africa’s new finance minister. Intellidex analyst Peter Attard Montalto says that in the grander scheme of things on the ANC spectrum, Godongwana is certainly close to Tito but to the left of him. Attard Montalto does not expect a new change in fiscal policy, though we are likely to see continued slippage under Godongwana’s leadership.

Read more here. 

In an Intellidex report for the Banking Association South Africa, Deputy Finance Minister David Masondo says corruption has been used by some to discredit or discourage the need for transforming our economy and society. He emphasises that the transformation achieved so far should give us all hope and courage that genuine transformation is still achievable. Read more here. 

EFF land model could trigger a financial crisis that would happen far faster than the election cycle.


This column was first published in Business Day. 

Fifteen years ago I was sent on assignment to report on the banking industry in Angola for the Financial Times group. It was a few years after the civil war and there were promising signs that the economy was picking up.

Staying in the only business hotel in Luanda at the time, I defied the exhortations that guests not go out onto the streets unaccompanied and went walking one evening. A few blocks up the road, assaulted by the smells of sewage intermingled with cement I came across an oasis. Light music was emanating from behind verdant foliage alongside the street. Peering through the entrance I saw a bamboo-constructed bar with a few people sitting at it and wandered in.

The owner was serving, and we began talking about his business. I had come across a nursery of sorts, which supplied indoor plants to the formal businesses of Luanda — De Beers and some of the oil multinationals. Every month or so he would fly to Johannesburg, head to Keith Kirsten’s and fill an airborne container with office plants. Their price in the Angolan capital was multiples of that in Johannesburg, but his business was able to turn a good profit. The bar he’d set up in the nursery added revenue.

Why, I asked, did he not simply grow the plants? That would surely substantially reduce his costs and maximise profits? Oh no, he told me. It was extremely difficult to obtain the rights to a piece of land. And as soon as he had such rights and started planting, some local bureaucrat was sure to come by demanding some form of benefit in return for leaving his rights undisturbed. He motioned around where we were sitting and pointed out that every plant there could be picked up and moved — they were all in pots. If for some reason his right to occupy this little corner of Luanda were threatened, he could just move on.

I was reminded of that conversation by the news last week that talks have broken down between the ANC and EFF on amending Section 25 of the constitution. The split between the two parties is fundamental — the EFF wants all land to be owned by the state, whereas the ANC wants private ownership but a more just distribution of it. Justice minister Ronald Lamola last week said it is giving up on talks with the EFF to align. This means the ANC won’t get a two-thirds majority and Section 25 will go unchanged.

The EFF model is effectively that of 1975 Angola when all land rights were transferred to the state. As I’ve written here before, it is established that countries with weak property rights grow slower than those with strong ones, but that can be irrelevant in the short-term political cycle. The challenge for the EFF politically is that in SA land rights and the economy are tightly bound. Mortgages cover about a quarter of all assets in the banking system. Should there be any threat to the ability of the lender to take possession of a property from a defaulting borrower and sell it at a market price, banks would immediately face an increase in losses. This could trigger a financial crisis that would happen far faster than the election cycle.

The EFF cites the shift from old order mining rights brought about by the Minerals and Petroleum Resources Development Act (MPRDA) in 2004 as a model for land reform. This is a poor comparison. Once it is out of the ground, gold, platinum and iron ore belong to the miner. Land rights are different because you want the holder of the right to focus on increasing the value of the land itself, as that maximises the tax take. The MPRDA had the effect of forcing mining companies to actually mine the rights they were sitting on. A similar regime applied to all land would simply discourage them from investing in inalienable improvements to the land.

The MPRDA also provides a salient example of the challenges of administratively complex rights administration. There are more than 5,000 applications of various forms backed up at the department of mineral resources & energy, resulting in a virtual standstill in exploration and new development. In a survey late in 2020 miners estimated that R20bn of projects are on hold because of the permits snarl up. Many that have been granted have ended up being unpicked in court because they’ve often been granted to multiple parties. Much of this reflects the incompetence of the department in managing mining rights, but the fundamental complexity of the regime was always going to overwhelm a government with limited technical capability.

Focus will now turn to the Expropriation Bill that will work within the existing constitutional order. The draft has fundamental weaknesses, especially in applying to all property rather than just land, and the focus must now be on ensuring the final legislation manages to deliver both justice and economic development.

Meanwhile, Angola is still trying to re-establish property rights after reforms in 2004. It is now possible to own land, but for Angola’s vast rural agricultural population this is only in theory — accessing formal rights from a government with limited capacity remains only a dream.

Theobald is chairperson at Intellidex.