The Midrand head office of African Bank does not look like the home of a lender that nearly closed up shop just over a year ago.
Its parking lot is full; inside its still-comfortable, air-conditioned offices there is the steady hum of activity.
Despite skating to the edge of total closure under the weight of bad debt, its rehabilitation appears to be on schedule, with the launch of the “good bank” still set for early April 2016. At a briefing this week, the bank’s curator and its new executive team announced plans to diversify and expand its business, alongside an update of the proposed rescue package being put together for the bank, and its latest financial results.
This is good news for the state, which has, through the South African Reserve Bank, been a linchpin in financing the rescue of the lender.
But although African Bank’s leadership team detailed its plans to expand its client base to include more affluent customers, it also acknowledged it faces intense competition, a tough economic environment and restrictive regulations.
Said African Bank’s curator, Tom Winterboer, thanks to the passage of time, which has allowed for better cash collections, the hefty loan and guarantee the Reserve Bank was expected to provide African Bank as part of the rescue package has reduced somewhat.
In August last year African Bank, a subsidiary of African Bank Investments Limited (Abil), ground to a halt under a mountain of bad debt. The Reserve Bank moved to salvage African Bank, placing it under Winterboer’s curatorship, though not without investors avoiding losses. Holding company Abil, which also incorporated furniture company Ellerines and insurance arm Stangen, was placed into business rescue.
The rehabilitation process involves folding the good business written by African Bank, both before and since its crash, into a “good bank” and its bad loans into a residual bank.
Notably, an initial loan from the Reserve Bank to facilitate the transaction has been reduced from R4.3-billion to R3.3-billion.
An “evergreen” guarantee from the Reserve Bank of R5-billion, intended to cover claims arising in the transfer of assets from the residual to the good bank, will be reduced to R3-billion over eight years.
Including the R5-billion in equity that the Reserve Bank will put in alongside a consortium of private banks, this should bring down state support for the rescue process from R14.3-billion to R11.3-billion.
African Bank is also in talks with insurer Guardrisk, to provide insurance to bank customers on a “cell captive” basis. These talks were initiated after plans to acquire Abil’s insurance subsidiary Stangen were scuppered by legal challenges to the business rescue process by empowerment shareholders.
African Bank showed some improvement in its financials, with losses for the year ended September 30 2015 narrowing from R9.3-billion in 2014 to R7.2-billion.
Loan disbursements are rising off the lows experienced just after the bank went into curatorship, said Brian Riley, chief executive of the good bank, explaining that they had reached R890-million in October and R850-million in November. This was thanks to improved staff morale, better internal processes and more effective advertising and marketing.
But the battle to get the business back on to a sound footing is not over, particularly in the face of new credit regulations limiting the interest rates and fees lenders can charge, as well as draft regulations that propose changes to credit life insurance. This is insurance sold to consumers, to cover their loans in the event that they die or are retrenched.
In addition, general economic conditions have toughened over the past year and consumers remain under strain, given that interest rates have increased steadily in recent months.
In its latest quarterly bulletin, the Reserve Bank noted the ratio of household debt to disposable income had risen from 77.7% in the second quarter of the year to 78.3% in the third. Meanwhile, the cost of servicing household debt as a ratio of disposable income had increased from 9.4% to 9.6% over the same period, the highest level since the third quarter of 2010.
The new regulations alone are expected to affect the business by an estimated 30%, Riley said.
African Bank has traditionally targeted low-income customers but aims to change this.
“Clearly we cannot grow our book just in the LSM [living standards measure] categories that we have at the moment,” he said, explaining that the new banking licence was issued on the basis that African Bank diversify its business, which could include its customer base, product offering and disbursement channels. African Bank intended to move on all three, he said.
The bank has launched a new contact centre – customers no longer have to go into a branch to apply for or receive a loan.
“That puts us in good stead to go into a slightly higher LSM in the new year,” said Riley.
It also aims to overhaul its noncompliant digital channel, which should be up and running again by the middle of next year.
Further, it would diversify its product range, including offering transactional banking, which would take time to implement, Riley added.
It was unlikely to happen in the next 18 months, he said, particularly as it required creating sufficient credibility before clients would deposit their salaries with the bank.
Given the economy’s state, there was “no free business out there”, he said. “It is literally a zero-sum game … There is no big growth area. It is about what is the best offer, what is the best process and so we are going to be in a very competitive market over the next three or four years.”
Kokkie Kooyman, portfolio manager at Denker Capital, said targeting more affluent customers would not be easy, given the damage the brand had suffered.
“The only way you grow a lending book is by lower pricing, proximity of branches, access to their employer or giving loans to clients who have been declined by other banks,” he said.
“The existing climate will make the last category easier – but you’re going to load yourself with a lot of potential bad debts.”