African Bank has come far since its former parent, African Bank Investments (Abil), found itself facing total collapse in August 2014, forcing the Reserve Bank to put its lending unit in curatorship.
Under the stewardship of new CEO Kennedy Bungane, the former head of Barclays Africa who took over from Basani Maluleke in April 2021, African Bank plans to list by 2025. Not only will that give the Reserve Bank and others an opportunity to exit their shareholdings taken on as part of its rescue, it will also mark the final resurrection of what was once SA’s biggest unsecured lender before its near demise almost upended the country’s financial system.
While Bungane did not respond to requests seeking an interview for this article, he said during the company’s annual results presentation on November 29 that his strategy is to expand African Bank’s core retail business to build further scale in the “underserved” consumer market. He wants to do the same for small business by adding a digitally enabled SME banking offering to diversify away from pure consumer credit to create a “compelling listing proposition” for potential investors.
“[African Bank] has had its lowlights but has come back,” said Bungane. “We can build this customer-centric, digital and data-enabled, diversified business that has scale, is sustainable and is a compelling listing proposition. A bank for the people, by the people, serving the people.”
That the “new” African Bank has been able to rise from the ashes arguably vindicates the plan hatched by regulators and rival banks to save it in 2014. Yet, its eight-year revival has been more difficult and arduous than initially expected.
“African Bank is certainly a different animal to what it was in 2014,” said Radebe Sipamla, an investment analyst at Mergence Investment Managers. “The rescue process put together by the Reserve Bank has certainly been successful but it hasn’t come back to the listing market as quickly as initially anticipated. One could argue that the process could’ve been quicker.”
Crowded market
The complexity of trying to save African Bank from extinction is underscored by the country’s banking laws having to be changed to facilitate its revival. The Banks Amendment Act, which came into effect in June 2015, was drafted at least in part to expedite the “old” African Bank’s curatorship process and limit the potential financial liability the state would have faced if the effort failed.
While that risk of failure seems to have been averted, the “new” African Bank now faces a far more crowded and competitive market characterised by customers who are increasingly focused on digital capability and cost; neither has it been easy for the Reserve Bank and other stakeholders who participated in African Bank’s rescue to exit as shareholders.
In March, the Reserve Bank had to ditch plans to sell African Bank directly to investors after prospective local and international buyers made an offer that local authorities deemed unsatisfactory. That caused the Bank to announce that African Bank would instead be listed, a process that should allow it to finally offload its 50% holding.
Remaining shareholders include the Government Employees Pension Fund (GEPF) which holds 25% and a consortium of SA’s five largest lenders who hold the remaining 25% on a pro-rata basis. They are FirstRand (7%), Standard Bank (6%), Absa (5%), Nedbank (4%), Investec (2%) and Capitec (1%).
When the old African Bank collapsed in 2014 it had more than 3-million customers and was widely seen as the next big thing in the local lending market. However, that fairy tale came to an ignominious end when Abil revealed it needed to raise R8.5bn through a second rights issue in less than a year if it was to survive after its lending subsidiary, the old African Bank, incurred billions of rand in credit losses that left it unable to repay debt.
Capital-raising
In the ensuing mayhem Abil's stock price plummeted in a matter of days, wiping out shareholders who had bought into the hype about the group’s lending business and resulting in its shares being suspended from the JSE. The value of debt instruments issued by the old African bank also halved, raising the prospect of senior creditors — mostly institutional investors — taking drastic haircuts on their holdings. Subordinated debt holders also faced the prospect of losing everything.
However, under the Reserve Bank-led curatorship, the old African Bank was split into a good and bad bank with the country’s largest lenders agreeing to underwrite a R10bn capital-raising exercise to kick-start its revival.
The new African Bank housed the loans deemed viable while bad debts remained in the old African Bank, which now operates as Residual Debt Services (RDS). A chunk of the bad debts stemmed from loans dished out to customers at Ellerines, the now-defunct furniture group African Bank bought in 2008.
Responsibility for Abil’s downfall remains a moot point. A 2016 report commissioned by the Reserve Bank blamed the hubris of former CEO and founder Leon Kirkinis, while the Public Investment Corporation (PIC) said it was due to overly aggressive lending and undisciplined risk management. Former auditor Deloitte has also shouldered some of the blame.
Though black investors who once held almost 5% of Abil tried to sue Kirkinis and at least nine other directors for losses incurred due to the collapse, their efforts came to naught when the Constitutional Court in January 2021 dismissed their attempt to challenge a Supreme Court of Appeal ruling against them a year earlier.
More accounts
Since the new, healthy bank started operating again in April 2016 as African Bank Holdings Limited (ABHL), which houses both lending and insurance businesses, it has gradually grown its retail deposit base to reduce its reliance on wholesale funding. It has also tightened the discipline of its lending while under Bungane it has rapidly accelerated its diversification with the purchase of Grindrod Bank.
It also bought Ubank, a similar lender that had also been under curatorship, in an R80m deal that gives it 4.7-million more accounts, mainly in rural and mining communities. Bungane told Business Day in late November that African Bank may run a pre-initial public offering (IPO) in 2023 to bring in mining investment schemes and staff as additional shareholders, though this remains a plan rather than a certainty.
“If you look at how they’re growing deposits and credit card spend they’re clearly gaining market share,” says Mergence’s Sipamla. “They’re also managing risk a lot better and under the new leadership are diversifying away from being just a personal loans business.”
The R1.5bn Grindrod Bank buyout announced in May will also see African Bank targeting 100,000 SME business clients by 2025. That will put it in direct competition with Capitec, which has long since usurped African Bank as SA’s biggest unsecured lender.
Bungane has set aggressive financial goals to be met before the proposed listing, under a strategy dubbed “Excelerate25”. That includes tripling profit to R2.5bn by 2025 and more than doubling its retail customers to 3.5-million, from 1.54-million.
That draws a line in the sand for prospective investors who will no doubt expect Bungane and his executive team to deliver before buying into the African Bank renaissance upon its eventual listing.
“We’d certainly look at buying if the numbers are right,” said Sipamla. “If they look juicy we’ll take a bite.”
RDS — the ‘bad’ bank doing good
Residual Debt Services (RDS) is the entity that now houses the bad debts of the “old” African Bank. .
The bad debts were initially housed in the old African Bank after its 2014 curatorship, with the lender subsequently becoming known as Residual Debt Services (RDS).
Since then RDS has done a remarkable job of collecting on the old African Bank’s bad loans in an effort to repay creditors.
Earlier this month it announced that senior debt instrument holders had been repaid R7.1bn, an amount that fully settles their nominal debt holding of R3.6bn and includes about R3.5bn in interest — meaning the have effectively doubled their money over six years.
“There’s definitely been a concerted effort and collaborative approach with African Bank to right the book ... and collect as much as we can for creditors,” curator Craig du Plessis said in an interview. “A number of initiatives have resulted in collections exceeding expectations.”
However, that still leaves about R7bn of subordinated debt, held mostly by institutional investors. RDS is still collecting on this book but has said it expects to recover only 15.9%-22.2% of that amount (based on September 30 estimates) depending on whether there are any legal claims on the indemnity reserve set up to cover such events.
“That’s the nature of being a subordinated debt holder — you get paid after the senior debt holders,” says Sipamla.
Once the process to collect the remaining bad debts has been exhausted RDS will essentially cease to operate. However, there are still legal matters such as an outstanding Sars tax matter related to the deductibility of impairment provisions in prior years; a R20m contingent liability to the Government Employees Medical Scheme (GEMS); and a legal dispute with Company Unique Finance over a 2004 transaction with the old Abil.
“As long as we still have ongoing matters the curatorship process can’t technically be concluded,” said Du Plessis. “Once we get to a position where we can decide whether we’ve maximised recovery for creditors and resolved outstanding matters ... then RDS will be in a position to decide whether to wind up and call the curatorship to an end.”
Either way, none of these issues directly affect the new African Bank, whose only real connection to RDS is a service level agreement for it to continue collecting on the outstanding debts of its former parent.
“That’s the only relationship between RDS and African Bank,” said Du Plessis. “There’s no structural or shareholding connection.”
Update: December 13 2022
This story has been updated throughout to better distinguish between African Bank Investments Ltd (Abil), the holding company listed on the JSE, and its lending unit commonly referred to as the “old” African Bank, which was placed under curatorship in 2014. The incorrect reference to Residual Debt Services (RDS) buying African Phoenix Investments has been removed.
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