Bank has more cash than it can lend
THE new African Bank is embarrassingly healthy, in a sense. It has about R20.4bn in cash, half from fresh equity. That is sitting on deposit with other banks earning little interest, while African Bank is paying interest on bonds and other wholesale funding.
That would be great if it had something useful to do with the cash, but it doesn’t. While the numbers are hard to analyse through the restructuring, it looks as if the bank is collecting about R1.6bn a month of a R22.1bn loan book, net of provisions. In the six months to end March, it wrote new loans of R4.6bn, which implies that on a net basis it is receiving twice as much cash as it can lend.
So in the first major decision as a resurrected entity, the new African Bank is buying back $500m (R7.3bn) worth of its bonds trading in Europe out of a total R14.5bn. It also has R11bn of domestic wholesale funding.
That will help what matters: profitability. By shedding unnecessary funding, it can improve its net interest income, ensuring the money it is earning from its loans is not used to pay for funding it does not need. It has to be careful though. The bank would struggle to raise funding before it has proven the viability of its new strategy, so it needs to hold enough to cover its growth.
CEO Brian Riley has outlined a strategy that will see it become a more traditional bank, reliant on depositors for funding and a wider range of lending. That will make it more stable, but it will need to develop that strategy while getting a grip on profitability. The last numbers for the bank are to the end of March, days before the new structure was implemented, so it is hard to tell how profitable the new bank might be. At first it is likely to lose money while it increases volumes. In the meantime, shrinking the balance sheet is a sure step on the road to profitability.
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here are two entities left in African Bank’s ashes. One contains the bad assets, now called Residual Debt Services; and the old listed holding entity, African Bank Investments Ltd (Abil).
Following an almighty fight, Abil has been left with Standard General insurance as an operating asset rather than having it transferred to the new African Bank, which was the curator’s plan. It has a book largely of credit life policies written on old African Bank loans.
The new bank is trying to compete with Stangen, replacing its policies in its existing book and writing new policies on all new loans. It will be interesting to see how much cash Abil can suck out of Stangen before African Bank replaces the policies.
The Abil business has a net asset value of 31c/share, coincidentally in line with the 31c that the share had crashed to before it was suspended in August 2014. But it also has R1.1bn of preference share funding that was raised for the old African Bank.
There is no requirement for African Bank to pay this back, but it cannot distribute any dividends until preference share dividends have been settled.
A newly constituted board may well decide to make a go of building a new business using the funding available to it from those preference shares and cash that will still be generated from Stangen. That would no doubt annoy the preference shareholders, who I’m sure would rather get their money back than watch it being deployed in some new-fangled business. But the ordinary shareholders may not see it that way — they could try to bargain with preference shareholders to get them to agree to some level of write-off, increasing the amount available to be distributed to ordinary shareholders in a winding up.
I suspect lawyers are the only ones who will get rich in the process.
Taxpayers must watch Residual Debt Services, for its success will determine how much of the Treasury’s R7bn guarantee will be called on. It holds a book with a face value of R11.3bn, of which R7.1bn has been impaired, leaving it with a net book to collect of about R4bn. The balance sheet is carrying a string of losses from the old African Bank, leaving it almost certainly technically insolvent, though by how much is hard to determine, as deconsolidated figures have not been published.
The curator will have his work cut out to ensure the last rotten piece of the African Bank disaster does not end up costing taxpayers money.