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A response: Lafferty's 2017 Global Bank Quality benchmarking study

Jul 03 2017 14:11
*Petar Soldo

CEO of Digital Republic Consulting, Petar Soldo, who is considered as the leading expert in South Africa in terms of banking research, weighs in on Lafferty's 2017 Global Bank Quality benchmarking study.

It found that SA’s major banks have the highest average of any country for the second year in a row.

The ratings are based on based on information available in the public domain such as each bank’s business model, assessed in terms of factors like strategy, culture and management.

It is always reassuring to hear good news relating to South Africa and its economy, especially in the current environment of ratings downgrades, declining consumer and business confidence, increasing levels of unemployment and an economy that is in a technical recession.

South Africa’s banking system has consistently been rated one of the most advanced and well-functioning in the world (not just the developing world).  So findings from Lafferty’s 2017 Global Bank Quality benchmarking study, a credible source, is welcome.

There is no doubt that in general the big 5 banks in South Africa are all top notch banks and are often world leading. Many of the local banks consistently win global awards e.g. FNB was named the world's most innovative bank of the year at the 2012 BAI-Finacle Global Banking Innovation.

Capitec, in particular, has been a star in the banking industry for many years and shows no signs of a waning ambition to contain as such.

In looking at the Lafferty study, it is important to look at what lies behind the press release. There are numerous interviews and articles already written largely based on the press release or some media interviews conducted.

Unfortunately none of the articles that I have seen to date, seems to ask any real probing questions. One can also not really expect Capitec (5 star) or Barclays Africa (4 star) to question the results. Why would they when it makes for brilliant PR?

And to be fair, Lafferty is a for-profit business, so the full details of the benchmarking study are only provided to clients, so the media at large is reliant on what was publically released (or to become a client), so some of what follows may be addressed in the full study; nonetheless, without some of this information, it is difficult to assess the publicly released data.

I think to fully assess the importance of an announcement like this, one should do so.  From the Digital Republic Consulting perspective, I think there are a few salient issues that we would raise:

1. The benchmarking study is based on 100 banks selected by Lafferty.  My initial reaction to this was it seemed odd that 5 of those 100 banks were actually South African.  

If one looks at the largest 100 banks by total assets, then SA doesn’t have a single bank in that list.  

The question then needs to be asked on what basis or what criterion were these banks selected on and how representative is the data really?

                                                                                                                     Source: Wikipedia

2. The second question to ask would be what components or variables are used to come up with the overall rating and how are those variables weighted.  This is always a tricky element since professional services firm develop their own IP and generally do not like to share that so one ends up with a catch-22 situation, where independent parties can often not see what the scores are based on.

3.The next concern we would raise, is around the primary mechanism that Lafferty used to compile the benchmark study, namely the public annual reports of the banks. There are three flaws with this approach:

a. Annual reports are not as solid or reliable as one often assumes. There are numerous instances in SA and across the world where results have had to be restated or adjustments made.

In the local banking market, once doesn’t need to look too far back to realise that annual reports can be a terrible predictor of the future. African Bank was confidently talking up its prospects and conducting a massive rights offer in late 2013 and yet 18 months later was placed into business rescue.  

b. As anyone who has spent time going through annual reports by banks - especially in SA - will have noticed, it can be near impossible to discern a lot of information, for example: the banks’ regularly restructure units which result in changes in reporting or poor results in one area or obscured by combining it with a better performing division.

c. Whilst there are certainly valuable ratios that one can derive from the annual reports, a lot of the Lafferty methodology and ratings seem to be based on a “system uses a heuristic methodology to interpret the signals that banks are sending out in their annual reports”.  Such a system is just too subjective, especially when the levels and nature of disclosure, commentary and forecasts various tremendously across banks and often by a bank itself (year to year).

So having highlighted three areas that warrant further details before one can assess the credibility of the results, it is important to again mention that SA has a world class banking system and that Capitec is a phenomenal bank and question marks around the study do not change either of those facts.

*Petar Soldo has more than 12 years experience in conducting research products for the major banks in SA across all consumer and business markets. He is also the founder and CEO of Digital Republic Consulting, which is a specialist analytics firm that focuses on social intelligence, market research and data analytics.

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