The Reserve Bank's probe into the collapse of the unsecured lender will include the possibility of intentional fraud.
The African Bank saga took a new twist this week – the South African Reserve Bank announced it is launching an independent investigation into the unsecured lender.
This has raised questions about how far the rot at the bank might go, and the market is still waiting for the Reserve Bank and the curator to reveal more details about the salvage plans for the “good” part of African Bank.
On Tuesday, the Reserve Bank stated it had appointed advocate John Myburgh to investigate, among other matters, “the business, trade, dealings, affairs, assets and liabilities of African Bank”.
Myburgh has five months to file a report on whether business was conducted recklessly, negligently or with intent to defraud any depositors or creditors. He will also assess whether its business involved any questionable management practices or material nondisclosures that were intended to defraud depositors or creditors.
The investigation comes after the Reserve Bank’s swift curatorship of African Bank in early August, following the announcement by its parent company, African Bank Investments Limited, that it estimated losses of R6.4-billion and needed to raise at least R8.5-billion through a second rights offer in less than a year, which led to a dramatic plummeting of its share price.
The Reserve Bank’s restructuring of African Bank saw it buying up the lender’s bad loans, with a nominal value of R17-billion, for R7-billion.
The salvageable part of the bank, with a book value of R26-billion, will be recapitalised with R10-billion, underwritten by a consortium, and relisted. The consortium incorporates the Public Investment Corporation (PIC), Absa, Capitec Bank, FirstRand, Investec, Nedbank and Standard Bank Limited.
But the details of the deal are hazy, analysts argue, and the Reserve Bank did not respond to questions about how the investigation may affect its rescue plan.
Rot may run deep
Stephen Logan, an attorney and a founder of nonprofit organisation Fair Credit, said that the rot at African Bank might go much further than initially thought.
The degree of trouble the bank has found itself in, even in light of earlier assurances by its executive management about its provision for bad debts, took the market entirely by surprise, he said.
African Bank’s management team has made it “absolutely clear” to stakeholders that there had been complete disclosure and that full provisions had been made, including in terms of accounting, regulatory capital and cash flow, Logan said.
The bad loans the Reserve Bank had taken on, which in effect meant shareholders writing off R10-billion, and the R10-billion recapitalisation, underwritten by the PIC and other banks, is “a vast amount of money”.
The scale of the problem could point to either negligent misrepresentation of the bank’s true state of affairs or “even intentional misrepresentation and fraud” by its executive management, he said. If the misrepresentation was because of gross negligence, it could be tantamount to a breach of the directors’ fiduciary duties.
Although it might not be a criminal matter, it would fall foul of the Companies Act and could allow shareholders to seek damages against the directors, Logan said.
These issues play into broader concerns that African Bank might no longer be a viable concern, he said, which would be a massive problem for the broader economy, particularly given the institutional investors’ level of exposure to African Bank’s outstanding debt, which is estimated to be at least R26-billion.
But at this stage it is very difficult to know whether fraud or any other illegal activity has taken place, Logan said.
If it is found that the directors or African Bank management had intended to misrepresent the bank’s true circumstances to any party or stakeholder, they could be criminally liable, he said, but this would have to be decided by a court.
A larger question is whether the Reserve Bank’s investigation will be sufficient. Logan believes this measure alone will do little to bring relief to African Bank customers who were extended credit they could not afford.
Provisions to address reckless lending are the purview of the National Credit Regulator through the National Credit Amendment Act, he said.
It is the regulator’s statutory obligation to investigate whether the loans granted by African Bank were reckless. If a prima facie case could be made, then the regulator would have to take the matter to court for the loans to be declared reckless and legally written off, he said.
Although reckless lending is not clearly defined, if loans had been made to individuals who were already in default against their existing credit obligations, this should be viewed as prima facie recklessness, Logan said.
Nearly 50% of credit-active consumers are credit impaired, meaning that they are at least three months in arrears, he said, suggesting that these consumers should not have been granted credit.
This is a significant legal consideration as it might not only affect African Bank, he said.
“Other banks are known to have been competing head to head with African Bank and they may also have relaxed their lending criteria to the point that their lending was prima facie reckless,” he said.
According to Christie Viljoen, a senior economist at NKC Independent Economists, the investigation into African Bank is probably something the Reserve Bank had on the cards from the beginning.
But it would have been unwise to make it known when the curatorship was announced, he said, as the Reserve Bank had to restore confidence in the banking sector and ensure there was no “big fallout in the financial markets and for African Bank clients”.
Unclear way forward
It is unclear how the investigation will affect the restructuring efforts and how the process will proceed.
The PIC has confirmed that it will underwrite 50%, or R5-billion, of the recapitalisation, although the amounts to be underwritten by the remaining members of the consortium have not been publicised.
The PIC also owned a 15% stake in African Bank equity when the share price collapsed. If, for whatever reasons, investors cannot be convinced to take up shares in the “good” bank, it is feasible that the PIC could end up with a hefty stake in what remains of the lender.
The PIC’s acting chief executive, Matshepo More, said that if this does happen, the PIC would analyse the investment and make a decision in accordance with its client mandate. All of its investment decisions “depend on the investment thesis at that particular point in time”, More said.
Media reports have suggested that the Reserve Bank will underwrite R2.5-billion, leaving the remaining R2.5-billion to be divided among the private banks.
The Reserve Bank also did not respond to questions about this.
Olga Constantatos, of Futuregrowth Asset Management, said that, in the event that the market showed no interest in the new bank, under normal circumstances underwriters would be committed to taking up the shares according to the proportion they had agreed to underwrite.
But the terms of the deal and the extent to which existing shareholders and bondholders will be able to participate still needs to be made clearer, she said.
The curator has recognised that the bank needs to continue writing good business to ensure that it merits investing in, she said.
Viljoen said that proving that the good bank remains a viable business will be a key test. The investigation could even restore much-needed confidence, he said.
If done properly, and if the Reserve Bank can weed out the problems, including identifying the managers who might have contributed to African Bank’s woes, it would indicate that the bank would be better managed going forward, he said.