In a surprising development last week, the SA Reserve Bank announced that after a lengthy process aimed at finding a buyer for its stake in African Bank it had not found a “suitable” suitor and would therefore resort to the traditional markets through an initial public offering (IPO) — when market conditions become conducive.
The sale of the Bank’s stake in African Bank is aimed at resolving the conflict of interest conundrum that has existed since 2014. Back then, as the bank was facing collapse, the Bank came up with an unusual solution. In its capacity as regulator, with an interest in maintaining the stability of the sector at large, it proposed a solution that involved the Bank itself, other banks that were competitors of African Bank, and the Government Employees Pension Fund (GEPF).
The model involved all these parties putting up the equity required to keep the bank functional, in exchange for a shareholding. The Bank ended up with 50%, the GEPF 25%, and the consortium of competitors 25%. Since then, African Bank has managed to navigate its way to viability and some semblance of market credibility, and having acknowledged that the position of acting as shareholder and regulator for the bank was undesirable, the Bank has been looking to exit its stake.
To this end, it commissioned advisers to explore options that would lead to a managed exit. After a process lasting more than a year, the Bank announced it had not been able to find a suitable buyer for its stake. “Suitable” is central to the bank’s regulatory mandate. Regulating banks has multiple nuances. One is that regulators are able to reject prospective buyers who have means but are undesirable as owners of banking institutions. The regulatory considerations are therefore not just limited to the question of affordability, but also the more elusive concept of suitability.
Back in 2016, when the Gupta family sought to own a bank of their own in response to all the other regulated banks opting not to keep them as clients, Habib Overseas Bank seemed open to the idea of a takeover. The acquisition of the bank would have presumably eliminated that headache of having to explain the complicated and unusual transactions the other banks kept interrogating. To eliminate such headaches, the buyers would have had to go for a major stake — which required the approval of the Bank Registrar and the finance minister.
As it turned out, the deal never saw the light of day thanks in large part to the reputation and profiles of those involved. In the case of African Bank, it is not clear who submitted a bid for the stake. Given the size of the investment made by all current shareholders in 2014 and the bank’s latest results, one can say it is not the most expensive bank on the market, so the reason it hasn’t been sold is not because someone could not afford it. But in addition to being able to pay the transaction price, the question of the buyer’s ability to put in more money should it ever be needed, is a unique feature of banking transactions. A shareholder of stature must afford the acquisition of today and the bailout of the future. That is the variable that suddenly reduces the playing field.
The more difficult aspect is making the call that a buyer with means is still undesirable. In the current deal, it would have been easy for the Bank to loosen its vigilance to facilitate its own exit. Opting for an IPO, where the value and market appetite are unknown, is something the Bank would have preferred to avoid. The fact that it decided on an IPO anyway implies that the regulatory oversight model remains robust. Loosening the standards would have helped the Bank itself and narrowed the range of issues it has to manage relating to the banking system.
• Sithole (@coruscakhaya) is an accountant, academic and activist.
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