CEO Tom Boardman, who has been at the helm of Nedcor for four months, faces a stiff test on Monday.
He will be announcing the banking group's annual results for 2003. It will be an announcement Boardman will make in less than ideal circumstances.
His pledge on taking the job was that his first challenge was to restore credibility to Nedcor's numbers.
"When you undertake to be open and transparent and give as much information as you can - because the market has being saying we're not sure of your numbers - you have got to make bloody sure you are sure of your numbers," he says.
But as Boardman has put that philosophy into action, the warts have sprung up beyond anyone's expectations. And, frustratingly for Boardman, the three-way merger of Nedcor Investment Bank, BoE and Nedbank has left the group without a functioning management accounting system, making it impossible for even Boardman to be entirely confident in the numbers.
"I just can't pull out the kind [degree of transparency] of information that I'd like to yet," he says. "We can only do our best. But in terms of quality of reporting, it is not going to be where I want it yet."
That is going to include lack of detail of segmental performance in the business - a further frustration for investors trying to gauge Nedcor's future earnings potential.
It will also make it impossible to determine whether the bank is on course for the R900m/year cost savings the BoE merger was meant to bring in by 2005. Indeed, the financial impact of the merger has been lost in the confusion.
Boardman's obsession with transparency is a result of growing mistrust in Nedcor's reporting during former CEO Richard Laubscher's tenure.
That reached fever pitch last year when controlling shareholder Old Mutual publicly declared its unhappiness with the level of transparency. One senior Mutual executive described Nedcor's financial numbers as "aggressive accounting".
Though the reasons behind Laubscher's departure in October have never been fully explained, Mutual's unhappiness with the numbers was doubtless a key contributor.
Laubscher and his team had taken to an "as you like it" form of reporting, trying to focus attention on "core earnings" that had been constructed to reflect the positives at the bank. Executives who served under Laubscher dispute this.
Boardman secured R2bn in capital from Old Mutual in December, when announcing yet another profit warning, to create the space to do a thorough clean-up of the balance sheet.
But insiders say that R2bn is not proving to be enough as more and more holes are discovered in the bank's lending books. Monday's announcement may well include a further capital injection, something Mutual will have to do despite its own balance sheet strain.
In total, the bank has issued four profit warnings to the market in the past year. It didn't take much for analysts, embarrassed by Nedcor's unpredictability, to give up all trust in its numbers.
"Nedcor continually uncovered problems as it went along," says Sanlam Investment Management banking analyst Ed d'Almeida of Boardman's clean-up efforts to date.
That so many holes have been found is Boardman's achievement. In December, he called on all Nedcor staff to come forward with any problems they had with the way things were run. There would be no consequences, he promised, under an amnesty that ran until mid-February. The response, according to insiders, was enormous.
And with it an indication that problems at the bank ran deeper than was understood. Now analysts expect the 2003 results to show a headline loss per share for the first time since 1985.
This is because the bank is having to make a series of write-offs to restore credibility to its balance sheet. These write-offs, which could exceed R2bn, relate to deferred tax, offshore valuations of assets, changed accounting systems, provisioning against certain loan books and the revaluation of inflated IT assets.
But here's the rub. Analysts doubt that Boardman can risk taking out all gremlins in one go. Says D'Almeida: "It is hard to say that this will be the end. The question is: do they have sufficient capital to take all the write-downs needed at once?"
And there may be more. "There is uncertainty relating to other possible asset write-downs," says Coronation Fund Managers financial analyst Neville Chester.
These may include impairment of assets in UK firm Gerrard Private Bank, consumer credit group Credcor and property company Monex. Monex owns the loss-making Ratanga Junction theme park in Cape Town.
Beyond write-downs, other pressures will bear down hard on Nedcor's 2003 results. "Operating margins will be hit by the R4bn debt taken on to finance the BoE acquisition in June 2002," says Chester. The debt, in the form of 10-year notes, carries a fixed 13,15% interest rate. Fine in 2002 when the prime overdraft rate was 16%, but now at 11,5% it is a source of negative profit gearing on a grand scale.
Compounding this, adds Chester, in early 2003 Nedcor locked in borrowings for six to 12 months in the non credit deposit (NCD) market. Before the big rate fall, NCDs were trading at about 13% and prime was 17%.
Boardman has not ignored the interest margin squeeze: acting finance director Bob Head took to hedging out the exposures as soon as he arrived on secondment from Mutual this year. It's too late for the 2003 numbers, though.
How much reliance can be placed on the forecasting efforts of analysts appears equally uncertain.
Forecasts from analysts canvassed by I-Net Bridge range wildly from a "core" EPS loss (excluding abnormal write-offs) of 138c/share to a positive 801c/share.
"There are just too many moving parts in the matrix making up 2003's results," says D'Almeida. "I think their problems will take longer to solve than most people are hoping," he adds.
Hardly the stuff investment confidence is built on, particularly with Nedcor's share price looking vulnerable to any worse-than-expected news.
It clawed its way back to R65 in early February, having bounced off support at R56 in December. Below this level, the next technical safety net lies at about R45. Its current lows are where the bank was seven years ago.
The key issue will be Nedcor's ability to fund growth off a diminished capital base. "It will have to be seen to be in the market as a lender to maintain credibility," says Chester. This may be a tough call. The bank has been slipping in market share against its big four rivals on almost all fronts.
"Nedcor is undercapitalis ed and needs a big rights issue," says Allan Gray fund manager Arjen Lugtenburg. "But Old Mutual itself is tight on capital." This is one of the reasons, he believes, it is making a bid for 100% of cash-flush Mutual & Federal.
Nedcor's capital structure is propped up by what Merrill Lynch analyst Alan Hartdegen terms "a stocking full of secondary [loan] capital", including the R2bn forked out by Old Mutual in December.
And there's more pressure to come. The Reserve Bank is pushing ahead with a plan to force banks to reduce their risk profiles. It is shortly expected to demand they increase their tier-one capital requirements (shareholders and preference capital) from 5% to 7,5% of liabilities.
Despite all this, these results may turn out to be Boardman's easiest. He can blame the bad numbers on Laubscher. He won't have this luxury when he reports interims in June.
