African Bank and its R1.5bn acquisition, Grindrod Bank, have embarked on a 100-day bedding-down process aimed at plotting the way forward for how the deal will kick-start the creation of a new business banking unit within the merged entity.
Though the deal is pending approval from regulators ranging from the Prudential Authority (PA) to the National Credit Regulator, competition authorities and finance minister Enoch Godongwana, the two lenders do not expect any hurdles. Nevertheless, Zweli Manyathi who runs African Bank’s new business banking unit in which Grindrod Bank will be housed, says the integration process needs to be carefully considered given that regulatory approval is still pending.
“The first task is to establish a clear post-transaction operating environment that will make the process as smooth as possible,” says Manyathi, adding that African Bank is faced with two options once it decides on a strategy of expanding into business banking.
“The first was a greenfield exercise and starting from scratch, which would have taken time, but then the fortuitous opportunity arose for us to acquire something as a building block and fast-track our journey into this market,” he says. “We embarked on a thorough evaluation process and found that the match between our joint capabilities and strategic intentions made for a perfect fit.”
The Reserve Bank, under whose authority the PA falls, owns 50% of African Bank as a consequence of the a previous 2014 curatorship process, and has made it clear it wishes to sell its stake to resolve a triple conflict of interest due to it being the lender’s regulator, biggest shareholder and lender of last resort. The Reserve Bank has indicated that it plans to list African Bank as a means of exiting its shareholding, though that process is likely to be delayed until Grindrod Bank has been fully integrated.
While regulatory approval is likely to take several months to finalise, the two banks have begun reaching out to existing and potential customers to outline their future business banking plans.
Manyathi says it will probably take a year or more before the Grindrod Bank plan is discontinued and that for the foreseeable future nothing will change as both entities have strong brand equity. One of the immediate priorities is to make sure there is an optimum culture fit between the two businesses, he says.
“One of the critical things I have learnt in my long business career is that no matter how the business case stacks up, unless culture aligns, you will find it exceedingly difficult to make this kind of transaction work,” he says. “I am cognisant of the difference in the markets we play in, as we stand right now. However, I believe the joint capabilities that come with this deal will be beneficial to African Bank. This means all of us have got to work hard in making sure there is cultural alignment internally. I do not think it is impossible to do that.”
Grindrod Bank CEO David Polkinghorne, who built the business from scratch, says one of the main opportunities he sees is the potential for growth given African Bank’s exceptionally strong capital adequacy ratio of 45.8% disclosed in its recent interim results for the six-months to end-March 2022.
“African Bank is sitting with enormous surplus capital right now,” says Polkinghorne. “That’s very inefficient from a balance sheet perspective, [so] we would love to get some of that because we’re sitting with a balance sheet that has huge amounts of liquidity but is restricted in terms of the capital we’ve been able to access from Grindrod. Getting some capital from them [African Bank] unlocks that balance sheet of ours, which is pregnant with potential.”
Polkinghorne says that while he does not see his role changing much in the near term he would love to see it evolve into a strong business growth position once the integration process is complete. While Grindrod Bank already has a strong client base in KwaZulu-Natal and Gauteng it sees growth opportunities in the Western Cape, he says.
“We’ve always had a strong commercial and industrial property business and we could certainly grow that significantly, particularly given the way the Western Cape economy is faring, The Western Cape and Gauteng for now would be our growth areas.”
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