African Bank’s demise entirely predictable
But no one seemed to realise the party was over
MY very first Rants and Sense column in this newspaper questioned why Leon Kirkinis, until this week one of the longestserving CEOs on the JSE with 23 years under his belt, was still in his job at African Bank Investments Limited.
After all, Kirkinis had overseen the biggest destruction of value in the financial services sector since the collapse of Saambou. Somehow, he had managed to keep the confidence not only of his board but also of the big institutional shareholders which, between them, control the company.
That all ended abruptly on Wednesday when the company announced he was going.
Eight weeks ago Kirkinis maintained he would be in the job two years from now, in 2016.
The already battered share price plummeted another twothirds to below R3 a share on substantial volumes when the news broke. Investors who thought they had seen the worst of the sell-off in African Bank from its peak of more than R40 a share 18 months ago must have felt as if they’d been hit by severe aftershocks from Tuesday’s 5.3magnitude earth tremor.
It got worse as the week progressed until the stock was trading at virtually nothing. At one point the entire business was worth less than R1-billion, indicating the market saw no chance of shareholders supporting its request for fresh capital.
The news was all bad. For starters, the group warned it was headed for a R7.3-billion loss, Ellerines remained an albatross around its neck, and it needed to raise at least another R8.5-billion in fresh capital on top of the R5.5billion last December.
The Reserve Bank issued a statement saying it was paying close attention to the company, but stopped short of intervention. The bank is concerned about whether bond holders, generally big financial institutions, face any systemic risk.
When I last saw Kirkinis in June he looked as if he’d done nine rounds with boxing legend Floyd Mayweather.
The spring in his step was gone, the cocksure optimism exhibited at previous meetings had drained from him. He did, however, maintain that he had the drive and energy to oversee a turnaround.
But shareholder patience was wearing thin. With the economy against him, he was running out of ideas and, as it turns out, time.
The company update this week was littered with excuses. It was the economy, the strikes, consumers who couldn’t pay their debts.
Of course, that is all true — but the environment African Bank faces is the same for the rest of the financial sector.
Bond investors too were happy to lend it money thanks to the above-average returns
For African Bank, its fall from grace was due to a calamitous failure of common sense.
Hindsight provides 20/20 vision, but the week’s events should have been entirely predictable.
Investec Asset Management, which owned about 25% of the company until 2004, sold out completely two years ago as the stock neared its peak.
Investec was concerned about the credit cycle.
Other institutions stepped into the breach as arguments for buying the share remained sufficiently compelling for asset managers to buy into the story.
Between them, Coronation, the PIC, Stanlib and Sanlam Investment Management hold about half of African Bank’s shares, and with its historically strong cash flows and betterthan-inflation dividend yield they have until now followed their rights.
Bond investors too were happy to lend it money thanks to the above-average returns they received. While it worked, everyone was happy.
African Bank was also founded at a time when banks didn’t lend to poor people. It survived the Saambou crisis and emerged stronger than ever.
Credit extension boomed through the first decade of the 21st century. But when the financial crisis hit in 2008, big banks that had been overzealous in doling out credit cards and cheap mortgages went sniffing round for the next big thing.
They spied the margins being made by African Bank and newer entrant Capitec, and joined the party. The market was quickly flooded with credit. Risk management went out of the window. Other business models adapted to the changing environment. Kirkinis appeared comfortable that he’d seen bad cycles before and that this time was no different.
While big rivals serve multiple markets and can open and close credit taps almost at whim, African Bank’s problem is that it is a one-trick pony.
As a lender that does not take deposits, African Bank lost better-quality customers who shifted business to fuller service offerings at other banks.
Abil continued serving the bottom of the pyramid where its customers are among the most vulnerable in society and usually the first to take strain when there is economic distress.
Its failure to adapt its business model is pivotal to its current difficulties.
MBA case studies will be written about the implosion of African Bank’s business model and the flaws of how microlending has evolved into what Adrian Saville, chief investment officer at Cannon Asset Managers, describes as a “crime against the poor”.
It’s a corporate governance teacher’s dream.
The lessons will focus on the tenure of the CEO, the inability of the board to grasp fully the magnitude of the problems they faced, whether there was appropriate regulatory oversight and just how much was invested in the history and stature of the charismatic and passionate CEO, who ultimately stuck it out too long.
There will also be questions about whether institutional investors did their jobs properly. Inasmuch as African Bank management will be pilloried as the blame game gets under way, the bigger question for all of us is how the people who invest our savings for our old age act to safeguard our future.
Whitfield is an award-winning business writer and broadcaster