After 20 months, the comatose African Bank has been resurrected. But it faces a very different world – one that is adjusting to significant regulatory changes to banking and the extension of credit, which are designed to prevent the kind of collapse that the lender experienced.
This raises the question of whether the new-look African Bank, which will be launched on Monday, will fly.
The bank, which was previously listed and privately owned, is now effectively a state entity, with 75% of its shareholding being held collectively by the Reserve Bank (50%) and the state pension fund, the Public Investment Corporation (25%).
There has been political agitation in recent times for a state-owned bank and the South African Post Office has spent several years attempting, unsuccessfully, to get a banking licence. Now, because of unforseen circumstances, the country has a state-controlled bank.
The new-look bank, which was granted its banking licence in March, constitutes a “good” bank loan book of about R29-billion, with a cash pile of R24-billion built up by customers paying their loans during the curatorship. There will also be a “bad” bank withR4.8-billion in debt. It is understood that this could be sold off at a giveaway price.
Regulatory changes include new caps on loan interest rates and fees, stricter affordability tests, restrictions on credit life insurance, a time limit for collecting bad loans, reforms to the attachment of salaries, tougher accountancy standards and new international requirements under the Basel III regulatory framework.
African Bank begins its new lease on life in a rising interest rate cycle and with the economic outlook being far more daunting than it was in its heyday.
“It is two different worlds from August 2014 until now – more so if you work at the lower end of the market,” said Hennie Ferreira, the chief executive of MicroFinance South Africa. “African Bank’s rescue, I think, came as a shock to many people – that it could happen to a bank and a regulated institution,” he said.
That shock, and the weaknesses exposed as a result of the 2008 global financial crisis, prompted reforms to tighten up local and global banking and credit systems.
But, with a new executive team at the helm and a set of new products and services, including taking deposits for the first time, the bank is bullish about its prospects.
Its designated chief executive, Brian Riley, says the bank will seek to introduce competitive offerings. “We intend to provide more value than what is expected by consumers, which will assist us to attract a higher-income and lower-risk customer base, in addition to recovering some of the better-quality customers we lost during curatorship.”
The void that African Bank left has been eagerly filled by Capitec Bank, which is also a big player in the unsecured lending market. In the past year, it has attracted another million customers and has grown its credit extension by 25%.
Stephen Logan, the founder of nonprofit organisation Fair Credit, said a retrospective check of the affordability assessments of African Bank’s bad debt must be conducted.
“It is absolutely impossible that there was no breach of the provisions of the NCA [National Credit Act] or Banks Act when it came to the demise of African Bank,” he said.
The new regulations do not allow for debt to be collected if the last payment took place three or more years ago and there is no acknowledgment of liability or the issue of summonses.
“Those prescribed debts are still being collected. I know from personal experience, as I still have a lot of people coming to me about this despite the law being changed,” Logan said.
In May last year, the Myburgh commission closed its investigation into African Bank and handed the report to the Reserve Bank. It looked at whether the bank had carried out its business recklessly, negligently or fraudulently. The Reserve Bank is not obliged to make the findings of the commission public and, to date, it has not.
Logan said that for all new regulatory measures to be effective, enforcement is critical.
The National Credit Regulator has to be required, and given the power, to do random audits, said Logan. He said that when a case is referred to the Consumer Tribunal by the regulator, the key technicality in many cases is whether the regulator had the jurisdiction to conduct the investigation in the first place.
Affordability criteria, for example, are designed to exclude social grant recipients because their entire income is assumed to be taken up by the basic cost of living. But cases of loan repayments automatically deducted from social grants continue to occur and should be a red flag, Logan said, adding that the regulator’s power needs to be extended to tackle matters like this effectively.
Amendments to the NCA have set out stricter and more prescriptive affordability assessments for lenders before they can extend credit. All existing debts and maintenance obligations must be considered in calculating discretionary income. Three months of payslips and bank statements must also be provided.
Conway Williams, an investment analyst at Futuregrowth, said this makes the granting of credit more cumbersome and costly but is a step in the right direction.
In May this year, revised caps on loan fees and interest rates will come into effect. Among the most significant changes is the interest rate relating to unsecured credit transactions, which will drop from 32.65% a year to 26.48%.
African Bank’s curator team said new interest rate caps will negatively affect business volumes by about 20%. “This is likely to be the case across the unsecured lending industry, given the impact that the lower caps will have on the appropriate risk-return relationship for certain customers.”
But the impact of this has already been factored into its forecast financials, the bank said.
Draft regulations on credit life insurance products, published by the department of trade and industry in November, aim to curb abuse of this facility, for which excessive fees were often charged.
African Bank’s highly profitable credit life division, Stangen, provided this kind of insurance and has been included in the “good” bank. The draft regulations propose a cap of R4.50 per month per R1 000 for credit facilities, unsecured credit transactions, short-term credit transactions and other credit agreements.
The bank said the debt on the books of African Bank before it was placed under curatorship remains. The bank was been split into two categories, a group of “good” assets, which are being transferred to the new bank group, and a “bad” group of assets, which will remain in the existing bank and will be collected over time. The existing bank will relinquish its bank licence and be renamed Residual Debt Services Limited.
“The new bank will target all such historic debt for recovery, some for its own account and some on behalf of the residual bank,” the curator team said.
But African Bank should not be allowed to sell on the bad debt, said Logan.
“It is intrinsically wrong not to write off the portion of the loan book that has been identified as the ‘bad bank’. Those debts have been acknowledged as reckless but that debt could still be sold by the Reserve Bank or curator to debt collectors,” he said.
Emolument attachment orders (EAOs) are intended to be used as a last resort only after a creditor has exhausted all formal avenues to collect debt. The orders allow for the debt repayment to be automatically deducted from the debtor’s salary.
It is an effective tool for debt collection (and is also used in cases where maintenance payments are owed), but the abuse of EAOs has become widespread and persistent, and orders are simply rubber-stamped by magistrate’s court clerks.
A judgment handed down in the Western Cape high court last year ordered that the EAOs must be issued by a magistrate in open court. Where the order arises from an agreement regulated by the NCA, it must be in the area in which the employee lives or works.
There is no legal mechanism to implement the judgment in the country as a whole, said Logan. “All emolument attachment orders should be reviewed for affordability and legality. The judgment isn’t sufficient as it does not provide a mechanism to redress all such orders.”
The Constitutional Court is due to rule soon on the law and practices relating to EAOs.
“The outcome is expected to have a significant impact on the unsecured lending market,” Williams said. “We are, however, of the view that this is a significant loophole to be considered by the regulator, as it is a known source of abuse.”
Spiralling bad debt saw African Bank forced into curatorship. Last year the curators revisited the financial results of the failed bank and disclosed that the financial loss in its 2013 financial year was R1.4-billion larger than the R4.5-billion originally reported.
The new International Financial Reporting Standard (IFRS 9), effective from January 2018, is intended to provide greater forewarning to investors in the future.
“Coming out of the financial crisis, there was a lot of criticism of financial reporting and that perhaps credit impairment losses became known a little too late,” said Kim Bromfield, a senior executive for corporate reporting at the South African Institute of Chartered Accountants.
The new standard will require the financial statements of banks and other financial entities to reflect their expected credit impairments.
“Focusing specifically on credit, there is a move from an incurred loss model to an expected loss model,” Bromfield said.
The accounting standard applies to financial reporting and is separate from regulatory reporting, the requirements for which the central bank specifies, she said.
Surveys by PwC show the top concern of chief executives for 2016 was over-regulation. Increased capital requirements have placed a burden on Barclays Plc, which in March announced it would need to significantly sell down its stake in Barclays Africa.
The Basel III international banking regulation requires banks to hold a great deal more capital to shore up balance sheets so they are better able to withstand the impact of a financial crisis.
South Africa’s major banks meet these new capital requirements, although meeting liquidity requirements has required some assistance from the Reserve Bank.
Kokkie Kooyman, the portfolio manager of Denker Capital, said the acquisition of Ellerines just before a recession placed a heavy burden on African Bank, along with prolonged mining strikes, which affected loan repayments.
But African Bank’s “fairly aggressive provisioning and capitalisation”, which had been adequate for many years before that, was insufficient when it came to the crunch.
“It is unlikely that the above situation will repeat itself, but I suppose the most important thing is whether the new bank will make upfront, conservative, dynamic provisions and will remain adequately capitalised at all times,” said Kooyman.
Williams said the quality of management must be considered, and also their view on risk and how they manage it. Before curatorship African Bank Limited had decent reported capital ratios, but still ended up in its predicament because of the way the business was run.
The bank’s curator team has said that although the total regulatory capital requirements of all banks are confidential, African Bank will target a 28% to 30% common equity tier one ratio (a measurement of a bank’s core equity capital compared with its total risk-weighted assets) by the end of the forecast period in 2018.
Williams said that in general, the regulatory changes that have been proposed and enacted have been positive. “We are, however, concerned about the implementation thereof, and the execution of regulation.”
With hindsight, the Reserve Bank should not have allowed the Ellerines acquisition, said Kooyman. “And it should have been more insistent on more conservative provisioning policies and capitalisation levels.”
Logan said better policing is required by the central bank.
“The Reserve Bank failed in its duty to properly supervise African Bank. It took action extremely late, well after the bank’s collapse, and was in dereliction of its duty,” he said.
“In the immediate wake of African Bank’s fall, there was quite a bit of muttering and people accusing and blaming the regulators,” said Ferreira, who recalled how the regulator was quick to blame the Reserve Bank. “There was a big lesson learned there – that regulators have to be co-ordinated. But I’m not so sure that particular relationship is being as co-ordinated as it should be.”
The relationship between business and the providers of financial services, specifically credit providers, can be much improved, Ferreira said.
“We don’t seem to have woven the tapestry strongly. In the new financial services landscape, all changes are met with knee-jerk reactions and end up in court,” he said.
“We need to sit around the table and deal with the new market … There is no well-understood strategy in taking services to the lower and middle market. There are a lot of moving parts and no one, including myself, sees the full picture.”
Bulelwa Boqwana, chief of staff at the South African Reserve Bank, said the Myburgh commission had concluded its work and handed a report over to the Registrar of Banks who would now, in consultation with the Finance Minister consider the next steps.”
African Bank pins hopes on building retail bank
The new-look African Bank has ambitions of becoming a successful retail bank, but will have to do a lot of work to rebuild consumer trust and attract deposits.
Its chief executive-designate, Brian Riley, earlier in March announced the bank’s long-term intention to offer consumers transactional banking services, allowing them to deposit their salaries into the bank and undertake day-to-day retail banking transactions. This would provide a new pillar of funding for the bank.
“We intend to make the offering a compelling alternative when we launch it in 2017,” Riley said.
African Bank will be launched on Monday with an equity base of R10-billion and a cash position of about R24-billion. The surplus cash, in conjunction with restructured wholesale funding arrangements, will enable the bank to build up a track record without the need to raise funds for several years. The bank will continue to offer loans and will diversify to offer a broader range of financial products and services.
African Bank and Sanlam have agreed to an initial arrangement to test the viability of a broader range of insurance products and services within the African Bank branch network.
The bank’s management said it is aware the bank is facing business specific issues, proposed regulatory changes and significant macroeconomic headwinds, but it “firmly believes the bank’s fit-for-purpose business model meets the needs of all key stakeholders, and will be further developed over time”.
The curator team said both collections and loan extensions are tracking fairly closely to their forecasts, indicating that the bank’s average monthly collections have remained at about R2-billion, in line with expectations post-curatorship.
“Average monthly collections for the period from October 2013 to July 2014 were R2.5-billion, while monthly collections from August 2014 to September 2015 averaged at R2.14-billion, indicating an approximate 14% reduction in monthly average collections since the curatorship date.”
The aim is to reduce the cost of finance over time, as investor sentiment towards the bank improves and retail funding comes into the mix from transactional banking and savings products.