Old Mutual bank in 2024
This will ensure it manages the risk of relying on a third party. INSURER WILL JOIN AN INCREASINGLY CROWDED MARKET
Old Mutual has announced that it has applied for a banking licence and plans to launch a full transactional account in 2024. The insurer will join an increasingly crowded market, following the entry of Discovery, TymeBank and Bank Zero in recent years. African Bank is also resurgent, having opened over one million transactional accounts (and in August it bought troubled Ubank, which potentially gives it access to millions more retail customers).
The irony, of course, is that Old Mutual owned a majority stake in one of the country’s big four banks, Nedbank, from 1986 until 2018.
In 2016 it announced that it would split into four businesses – Old Mutual emerging markets (its core African unit), Nedbank, Quilter (the UK money manager) and the US asset management business OMAM (now BrightSphere).
The theory was that the four businesses were disparate enough to each stand alone and, more importantly, that the sum of those constituent parts would exceed the value the market had ascribed to Old Mutual.
In this managed separation process, the majority of its 52% stake in Nedbank was unbundled to Old Mutual shareholders in 2018.
It retained a 19.4% “strategic” holding which was reduced to around seven percent after a second
unbundling in November last year. Expect this residual stake to surely be sold or unbundled now that it has announced its intentions.
The problem was that Old Mutual never wanted – or needed – to own an entire bank.
Nedbank is a lot more than just an outfit that has some retail account holders. It has a sizeable commercial and investment bank, a wealth unit, operations in SADC countries and a 21% stake in ETI (Ecobank Transnational Incorporated SA).
A 52% stake (with executives of the parent sitting in London) made the situation more complex than it needed to be.
Nedbank’s market capitalisation today is more than double that of Old Mutual (R114 billion versus R52 billion).
Old Mutual knows it needed to play in the transactional space. It already offers a basic account, the Money account, using Bidvest
Bank’s licence. This is marketed predominantly to its mass and foundation customer bases. (It also offers an unsecured lending product to these customers and says this “is already a strong contributor to group profitability”.)
Building a bank
The group has never disclosed the number of Money account holders, but it has a total of 6.2 million customers in South Africa. It also touts 1.1 million digitally active customers. Its Banking app has over a million downloads in the Google Play Store and even though this app is also used for its rewards programme, this still suggests that it has a not insignificant number of banking customers.
In its annual report last year, it listed “accelerate growth in transactional banking” as one of its three medium-term targets.
It appears that Old Mutual and Bidvest Bank clashed on the potential of this push into banking,
possibly product design and, very likely, fee structure. Or, as Old Mutual blandly put it: “A divergence of aspiration requires us to reassess our future arrangement to deliver on our customer needs.”
It says building its own bank will ensure it manages the risk of relying on a third party. Owning its own bank will also allow it “to hold the primary relationship with our customers” and ensure it cross-sells its products better. A licence will also enable it to “accept retail deposits, thereby providing a cheaper source of funding”.
Old Mutual has already spent R830 million on building out a transactional banking engine, and in total will spend R1.75 billion in capex.
It says the banking unit is expected to break even three years after launch and “as the capability matures post break-even, the return is expected to be significantly above the target return of four percent in excess of the cost of equity”.