Pfaff bows out
After eight years he’s heading back to private equity
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