Scores of small banks failed before VBS
Anyone doing the rounds of banks’ financial results presentations in recent weeks might have been startled to hear the failed VBS Mutual Bank described at the weekend as one of SA’s only black-managed and black-owned banks.
SA’s big banks still have a way to go regarding transformation at top management level, but their complexions are rapidly changing and that was clear from the executive committee panels up front at the various results presentations.
Standard Bank’s Sim Tshabalala and Investec’s newly appointed joint CEO, Fani Titi, may be the only black CEOs of the big five banks at present, but the number of black C-suite executives is increasing at all five.
And with their trillion-rand-plus balance sheets, Tshabalala and Titi arguably have immeasurably more power to affect SA’s economy and its banking sector than did the CEO of black-owned VBS with his R2bn balance sheet, suggesting that black ownership in itself isn’t necessarily a recipe for transformation.
But the latest round of bank results also comes as a reminder that no one actually owns SA’s big banks. They aren’t white or black; they’re just owned by a range of institutions, or all will be by the end of 2018. By that time it’s expected that Nedbank will have been unbundled from parent Old Mutual, making it the last of the big banks to be without a controlling shareholder after UK-based Barclays sold down its controlling stake in the bank that will now once again be called Absa.
But SA clearly has a smallbanks problem. And it’s one that was highlighted yet again when the Reserve Bank had to put VBS under curatorship on Sunday, adding to a long list of smaller banks that have had to be put into curatorship, liquidated or bailed out by larger banks in recent decades.
Most were white-owned or owned by other financial institutions, but a handful were black-owned: the original African Bank, which went into curatorship in the mid-1990s, or FBC Fidelity Bank for example, which was originally controlled by Thebe Financial Services and was put under curatorship in 1999, before eventually being bought by Nedcor. Some, such as Islamic Bank, were so insolvent there was no question of curatorship.
Few will forget lurid failures such as Regal Treasury Private Bank, which was put under curatorship in 2000 and whose CEO, Jeff Levenstein, ultimately went to jail. And although most of the failed banks were small, some were much larger.
Saambou, for example, was SA’s seventh-largest bank at the time of a disastrous run on its deposits that forced the Reserve Bank to put it into curatorship but also undermined confidence in the banking sector and drove out small and larger players.
After confidence was restored in the early 2000s there was a long period of calm before African Bank failed in 2014, followed now by VBS.
The pattern has tended to be typical: small bank grows too big, too fast, by taking far too much risk, ignoring repeated warnings by the regulators that their business models are not sustainable. It’s tempting when you’re a small bank with shareholders who want high returns. But at some point depositors and investors lose confidence and start pulling out their money, and the bank falls over. And while many of SA’s small-bank failures were a case of bad management, at least some involved outright fraud.
What the real VBS story will turn out to be has yet to be established, but at the very least it was a case of a management team that pursued an excessively risky business model that depended on just a few large and illegal municipal depositors for funding and that continued on its reckless path despite repeated warnings from regulators.
Banks are supposed to take risks, but those have to be carefully managed and tightly regulated. SA learnt its lessons in the small-banks crisis of the late 1990s to early 2000s, and as a result was one of the few countries to survive the global financial crisis with its banking sector intact. But the price has been a banking sector that became ever more highly concentrated after small banks exited in the early 2000s, with the big five banks now accounting for more than 90% of total banking sector assets.
Capitec is the one exceptional case in recent years of a small bank that successfully became a bigger bank. But until recently, the South African Reserve Bank’s office of banks hadn’t granted new banking licences since the early 2000s. The big five or six compete aggressively, but the sector sorely needs new, entrepreneurial, smaller banks to add dynamism and diversity — and more black ownership.
Regulators and policy makers have long recognised this and the scene has changed over the past year with the provisional licensing of three new banks: Discovery, Tyme and PostBank. No doubt the regulators would have loved VBS Mutual Bank to graduate to being a fully licensed commercial bank too, but that was not to be.
Its lessons and those of the string of small-bank failures before it, need to be learnt if SA is to aspire to transforming its banking sector into one in which small banks, of whatever colour, can survive and thrive.
IT WAS A CASE OF A MANAGEMENT TEAM THAT PURSUED AN EXCESSIVELY RISKY BUSINESS MODEL THAT DEPENDED ON JUST A FEW LARGE DEPOSITORS