Pfaff bows out

Af­ter eight years he’s head­ing back to private eq­uity

Finweek English Edition - - Openers - BRUCE WHIT­FIELD brucew@fin­

OUT­GO­ING CEOS of fi­nan­cial in­sti­tu­tions of­ten use “Go­ing into private eq­uity” as a eu­phemism when try­ing to scrab­ble for an ex­pla­na­tion as to why they’re leav­ing – es­pe­cially when the busi­ness they run has fallen on hard times. It sounds in­fin­itely more re­spectable than be­ing put out to pas­ture.

RMB CEO Mike Pfaff con­firms he’s go­ing into private eq­uity but de­nies he’s been pushed. To the con­trary; he says had there not been a blow up in the RMB pro­pri­etary trad­ing book he’d prob­a­bly have left sooner to pur­sue his own in­ter­ests.

Pfaff, the first non-founder of the group to run RMB, was ex­pected to an­nounce his res­ig­na­tion at the bank’s an­nual con­fer­ence on 2 Au­gust. Pre­vi­ous RMB CEOs Jo­hann an in­vest­ment bank not to have losses in a mar­ket like this,” says Pfaff, who adds re­sults over the past 12 months will be neg­a­tively im­pacted by the IFRS ac­count­ing stan­dard that re­quires as­sets to be marked to mar­ket value at the end of each re­port­ing pe­riod.

The group warned (in a trad­ing up­date in May this year) it had taken the de­ci­sion to sell down its pro­pri­etary trad­ing book, as it was con­cerned about ex­pos­ing the group to fur­ther volatil­ity. Then the port­fo­lio was at about a quar­ter of its peak and the group said, de­spite the fact it be­lieved it would yield long-term value, losses had con­tin­ued to be in­curred in the sec­ond half of its fi­nan­cial year to end-June.

“It be­came ap­par­ent there was mas­sive de-gear­ing hap­pen­ing in the mar­ket and there was no end in sight. It didn’t mat­ter how much value we saw in the book – there was no point in hold­ing on,” says Pfaff.

FirstRand Bank CEO Sizwe Nx­as­ana says Pfaff has been asked to re­main avail­able to the group un­til at least year-end. He’ll re­main on the board un­til his de­par­ture. At a time when global in­vest­ment banks have been let­ting CEOs go with sub­stan­tial pay­offs, Pfaff, who will be putting three sons through pricey Hil­ton Col­lege over the bet­ter part of the next decade, jokes it would have been con­sid­er­ably more prof­itable for him to be sacked with a mas­sive pay­out.

“I could have hung on for an­other year un­til things looked bet­ter, but I did say I’d take re­spon­si­bil­ity for what’s gone on and a con­se­quence of that’s been to stay longer than I in­tended to help fix the prob­lems that have oc­curred,” says Pfaff.

For now the Sevenoaks pro­pri­etary trad­ing team re­mains in­tact. How­ever, sources tell Fin­week it will not be that way for long as the unit re­fo­cuses af­ter sell­ing down the pro­pri­etary trad­ing book to about 25% of its size a year ago, in­cur­ring ad­di­tional losses to those re­ported at the half-year stage.

Among the de­par­tures will be Kevin Har­ris, son of CEO Paul, who, ac­cord­ing to friends, is re­turn­ing to Stel­len­bosch “to do some­thing else”. Ru­pert, GT Fer­reira, Lau­rie Dip­pe­naar and Paul Har­ris have all an­nounced their de­ci­sions to move on at the bank’s an­nual con­fer­ence. Staff at the FirstRand di­vi­sion an­tic­i­pated Pfaff ’s an­nounce­ment.

Pfaff ’s move will fuel spec­u­la­tion as to his suc­ces­sor, widely be­lieved to be Al­lan Pullinger, who was ap­pointed deputy CEO in April. Pullinger was pre­vi­ously head of RMB’s in­vest­ment bank­ing di­vi­sion.

“I’ve al­ways said I want to go back to private eq­uity. I’ve been CEO for eight years. It’s time to move on. I’m happy to let my record speak for it­self,” he says, know­ing spec­u­la­tion about his de­par­ture has been rife in the mar­ket since Fe­bru­ary, when he jok­ingly of­fered his po­si­tion to FNB CEO Michael Jor­daan at RMB’s half-year re­sults pre­sen­ta­tion.

The tim­ing of the an­nounce­ment comes at the height of the global credit crunch and fol­lows what’s likely to be an an­nus hor­ri­bilis for the FirstRand in­vest­ment bank­ing di­vi­sion. While its full year prof­its are likely to be its sec­ond best on record, they’ll also be lower than the R5,3bn bumper prof­its re­ported for its 2007 fi­nan­cial year.

The real dam­age has been done in the group’s eq­uity di­vi­sion. In 2001 RMB’s debt busi­ness made up 80% of its prof­its but that grad­u­ally de­clined as Pfaff drove growth in the higher risk eq­uity busi­ness. It was a strat­egy that paid off hand­somely. Eq­uity op­er­a­tions grew steadily and first out­per­formed debt in 2006 and in 2007 made up more than 60% of the busi­ness. How­ever, that pic­ture changed dra­mat­i­cally in first half 2008, when the group’s pro­pri­etary trad­ing team, which had earned R1,4bn in the pre­vi­ous fi­nan­cial year, lost R760m in six months. The pic­ture would have been con­sid­er­ably worse had the SA unit of the pro­pri­etary trad­ing team not made a profit to off­set the R1,37bn off­shore losses recorded by the Bri­tish team based at Sevenoaks in Kent.

Pfaff says a 40% com­pound an­nual growth rate in profit be­fore tax over seven years made RMB unique among in­vest­ment banks. “It’s not nor­mal. Bank­ing is a busi­ness in which you need to take risk, volatil­ity is a way of life. It wouldn’t be nor­mal for

Tak­ing a bow. Mike Pfaff

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