Economy at stake in zombie Bank debate
It has been called the zombie debate. The call for the nationalisation of the Reserve Bank keeps being shot down, yet it keeps coming back again. The ANC has tasked its economic transformation committee to research the topic, after it was persuaded in March to withdraw the motion it had tabled in Parliament to nationalise the Bank.
The party has promised to consult widely and to deal “sensitively” with the issue.
What the ANC still hasn’t done, though, is make it clear what it hopes to achieve with a buyout of the private shareholders the Bank has had since it was created in 1921, making it one of just a handful of central banks that still have private shareholders.
In its December resolution, the party said it was a “historical anomaly” that there were private shareholders in the Bank, which should be 100% state-owned. It said the government must develop a proposal for full ownership which “does not benefit private shareholder speculators”.
It didn’t say what difference full ownership might make to the Bank’s independence or its mandate of price stability, both of which are enshrined in Clause 224 of SA’s Constitution. Nor did it propose how to take out those anomalous private shareholders in a way that won’t benefit them.
On the face of it, there is no reason not to nationalise the Bank. It would make no difference to its independence or its mandate; the government appoints the governor and his or her deputies, along with the majority of the Bank’s directors in any event, and the private shareholders have no say over monetary policy decisions or any other policy decisions.
Equally, however, there is no reason it needs to be nationalised, and strong reasons why it should not, given the time and effort it could take to do the deal and the extremely negative effect it would have on investor and rating agency perceptions of SA. And the fact that the governing party, or some within it, continue to make nationalisation a priority raises questions about why.
One theory is that those lobbying the party to push for nationalisation are exactly those “speculators” out to make large profits from selling their shares to the state.
It’s not immediately obvious why, because on any conventional valuation method, the private shareholding in the Bank isn’t worth all that much.
The Bank, which delisted from the JSE a few years ago, has 2-million shares in issue, which trade, rather thinly, over the counter. They have traded as low as R2.50 a share recently but R10 a share is where you will most likely find a market now, Cannon Asset Managers CEO Adrian Saville notes, giving the Bank a market capitalisation of R20m. If the state could buy out the private shareholders for R20m it would be a fabulous investment, given the Bank’s bottom-line earnings of R1.2bn in financial 2017, and its net asset value of R9.4bn. Saville says this would mean you would be paying 0.2c in the rand for the Bank’s net assets.
A more routine way to value the shares for purposes of a takeover might be to look at the present value of the stream of future dividend payments shareholders would be entitled to. The annual dividend per share is capped at 10c, so the Bank pays out a maximum of R200,000 a year in dividends, which is all the state would get by nationalising those privately held shares.
Applying a simple discounted cash-flow model to the dividend stream gives a value of R1.10 a share or R2.2m in total, using the long bond rate of 8.95%, in Saville’s calculation. Using a 5% discount rate, it is R4m. Either is a lot lower than the typical over-the-counter asking price of R10.
The trouble is that all of these valuations are vastly lower than the R4,000 to R5,000 a share that certain of the shareholders were asking not long ago, or the R1,200 a share they are still reportedly determined to get. Perhaps they have in mind the example of the central banks’ banker, the Bank for International Settlements, which when it took out its private shareholders in the early 2000s had to pay three times the price at which the share had been trading on the market.
These speculator shareholders clearly have much larger multiples in mind and would take the Bank to court, locally and internationally, if it declined to pay up. German shareholder Michael Doehr has made it clear he would rely on the bilateral investment treaty Germany signed with SA in 1997 that prevents expropriation of assets without adequate compensation. Though the treaty has been replaced by SA’s Promotion of Investment Act, it has a 20-year “grandfathering” phase-out period, so Doehr and his buddies could use it any time until 2034.
SA’s cash-strapped government should not be spending even R20m on a pointless and time-consuming deal to buy out private shareholders in the Bank; it certainly shouldn’t be wasting R4bn to R5bn, but chances are that any effort to buy out Doehr and his friends for less might see the Bank and the government in court battles.
The direct costs would be the least of it. The Bank is the one institution whose integrity and independence remained unquestioned through all the Zuma administration’s effort to trash SA’s institutions. Monetary policy is the one area where the rating agencies still assess SA as “strong”. At this delicate stage, any change to the Bank’s shareholding structure would be seen as an attack on the institution and the fallout in the markets, and for the economy, could be enormous.
No one should underestimate that zombie.
THESE SPECULATOR SHAREHOLDERS CLEARLY HAVE MUCH LARGER MULTIPLES IN MIND AND WOULD TAKE THE BANK TO COURT IF IT DECLINED TO PAY UP