Re­viv­ing African Bank

Financial Mail - - INVESTOR’S NOTEBOOK - @scranston by Stephen Cranston

African Bank is a brand many would love to own. For many of its clients it is still the bank started by Sam Mot­suenyane and other en­trepreneur­s in 1964, decades be­fore the Fi­nan­cial Sec­tor Char­ter.

Most have now for­got­ten the wheeler-dealer days of African Bank un­der Leon Kirki­nis, when it drove SA’S be­strun fur­ni­ture chain, El­ler­ines, into the ground. The bank was placed un­der cu­ra­tor­ship in 2014.

But the cur­rent CEO, Basani Maluleke, has the in­tegrity and dy­namism to bring the bank into a new phase. The My­world trans­ac­tional ac­count, which she has launched, has brought in 258,000 cus­tomers since go­ing live in May 2019.

And of th­ese, just 43% had a loan or any other prod­uct with the bank. In the first six months of the year, which ended on March 31, it was sign­ing up 1,000 new ac­counts a day.

With­out Covid-19, African Bank was prob­a­bly three to five years away from a list­ing. Its largest share­holder, the SA Re­serve Bank, is not a long-term holder. There is an ob­vi­ous con­flict of in­ter­est be­tween the Bank’s role as reg­u­la­tor (the Pru­den­tial Author­ity doesn’t even pre­tend to be au­ton­o­mous from the Bank) and as share­holder of one of the banks it reg­u­lates.

The Gov­ern­ment Em­ploy­ees Pen­sion Fund was also brought in as a share­holder in a kind of dis­guised state in­ter­ven­tion, but it isn’t ap­pro­pri­ate for it to be­come a na­tional-pol­icy in­stru­ment.

Still, it has a bet­ter chance of a de­cent re­turn from African Bank un­der Maluleke’s lead­er­ship than from SAA, Eskom or some of the over­priced tech­nol­ogy in­vest­ments it has made.

For a start, African Bank is well cap­i­talised with cap­i­tal ad­e­quacy of 40%, while the big banks are com­fort­able with 11%-12% on their own bal­ance sheets.

The con­sor­tium of banks that make up the rest of the share­hold­ing (the big four plus In­vestec and Capitec) still haven’t re­ceived any kind of div­i­dend from African Bank.

Capitec is African Bank’s fiercest com­peti­tor so it is time that it left the con­trol­ling con­sor­tium.

Tough con­di­tions

That’s not to say that African Bank is sailing in smooth wa­ters right now. Maluleke says that even be­fore the Covid ad­just­ments, trad­ing was tough, with net profit down 6% to R503m.

Af­ter the ad­just­ment it recorded a net loss af­ter tax of R111m.

And even be­fore the ad­just­ment, African Bank was mak­ing a loss on its trans­ac­tional busi­ness — which re­mains sub­scale.

Maluleke read­ily ad­mits that most peo­ple come to African Bank for loans only af­ter their pri­mary bank turns them down, which ex­plains the eye­wa­ter­ing 8.8% credit loss pre-ad­just­ment and 12.5% af­ter­wards.

But Maluleke says 85% of loans are now given to low-risk groups. African Bank has a more com­plex def­i­ni­tion of low risk than Capitec, which con­sid­ers ev­ery­one earn­ing more than R15,000 a month to be in the low-risk bucket. Maluleke has her own se­cret recipe, which doesn’t as­sume peo­ple with higher pay are go­ing to be lower risk.

It will be an in­ter­est­ing list­ing when it fi­nally goes ahead, giv­ing the op­tion to in­vest in a mid­sized re­tail bank now that Capitec has joined the ranks of the mam­moths.

But we will need to see the fu­ture of banks af­ter Covid 19. The pan­demic could well have an im­pact on the sec­tor that will be far larger than the 2008 global fi­nan­cial cri­sis.

Capitec is African Bank’s fiercest com­peti­tor. It’s time it left the con­trol­ling con­sor­tium

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