/ 20 April 2018

African Bank CEO up for a challenge

Basani Maluleke is charged with refinancing African Bank and rolling out its transactional banking service.
Basani Maluleke is charged with refinancing African Bank and rolling out its transactional banking service.

Basani Maluleke stepped into the role of African Bank chief executive this month well aware of the formidable challenges that lie ahead. With some tailwinds in the economy at last, Maluleke hopes she can steer the bank where it needs to go.

The bank was put under curatorship by the South African Reserve Bank in 2014 and Maluleke, a trained accountant, former lawyer and investment banker, came on board as a nonexecutive director in 2015.

The allure? “It was the chance to work with people who are brilliant and the chance to do something which is extraordinary,” she said.

In July last year, Maluleke became the bank’s head of operations and, from April 2 this year, she took over from Brian Riley as chief executive of the new African Bank.

She will lead two critical missions. The first is to roll out the bank’s first transactional banking offering, My World, to the public towards the end of the year. The other is the refinancing of the bank.

“We have a maturity window in 2019 where we need to repay a significant amount to bondholders. Key is to start to show the market we are able to fund ourselves and to understand what the appetite is in the market to invest in African Bank bonds.”

It doesn’t help that the bank’s credit rating is several notches below investment grade.

“They [rating agencies] talk about the fact that, because we are not diversified, we are pretty much still a microlender in their view and that creates additional risk that they can’t ignore. Until we show diversification of the product range, I think we are still going to be under pressure.”

To this end, the bank has launched savings and investment products that offer the best rates in the market, which are gaining more traction than African Bank had anticipated. But the success of transactional banking will be key for ratings agencies and investors.

“The refinancing requires we show the market we have a retail base of funders, and also having retail depositors helps you to lower your cost of funding, so it’s critical we get that in.”

But it is vastly different to get customers to start giving the bank money rather than taking it, she says.

It is also critical for the sustainability of the bank to diversify its customer base and, over the past few months, 34% of all new deals are with new customers, she says. “Granted, that is still in our loan products … it’s going to take a while before people get to know us for more than just that.”

African Bank is also diversifying the ways in which its products can be accessed and is building what Maluleke describes as a “very compelling digital channel and digital strategy which delivers value and convenience to our customers”.

State-owned bank

Maluleke says African Bank is probably the best capitalised bank in South Africa. “We sit on a lot of cash just by virtue of how we were capitalised post-curatorship.”

The bank was split into two to isolate the “good” and “bad” components of the business. The good portion was recapitalised by a consortium consisting of six South African banks and the Public Investment Corporation, and underwritten by the Reserve Bank.

The Reserve Bank holds a 50% stake in African Bank as a result of its rescue and recapitalisation. This gives the bank a “halo” it might not otherwise have, Maluleke says. But “the bank must be able to demonstrate the ability to execute our strategy and the ability to fund ourselves independently of our current shareholders”.

So is African Bank the state-owned bank critics have been calling for?

“Don’t even joke,” Maluleke laughs. “This morning I was doing an induction for new people at the bank and I was saying to them, we are effectively an SOE [state-owned enterprise]. We are a state-owned bank.”

She says she finds the narrative about the need for a state bank confusing.

“But I think we have always been a bank of the people … the bank was started to service people who are typically excluded from the financial sector.”

Regulatory lending

The new African Bank continues to collect “a lot of money” from the bad bank’s book which resides within Residual Debt Services which remains under curatorship.

Despite widespread speculation that African Bank’s demise was attributable to reckless lending, an audit by the National Credit Regulator on the RDS balance sheet recently reported that just 2.61% of the credit agreements granted before the bank was placed under curatorship could be rated as negatively affordable. As such, these loans are not viewed as reckless lending but were written off in good faith.

For now, the core of African Bank business remains what it has always been — personal loans — and accounts for 90% of its revenue.

“It’s absolutely the breadwinner; it’s what keeps the lights on, it’s what pays the bills, and it will remain so for a long time.”

But Maluleke would like to get the business into a position where 60% of revenue is generated by loans and the balance by fees and other products.

Credit has undergone a great deal of change in recent years, including many new regulations, which were in large part prompted by the 2014 collapse of African Bank.

“I think there was absolutely a need for better regulation. I’m just hoping we don’t get to a point where the pendulum has swung too far … We need to make sure we stay close with the regulator so they understand where we are in terms of comfort levels with regulation.”

A recent ruling by the Western Cape High Court cleared the way for retailers and all lenders to extend credit without requiring customers to provide pay slips or other proof of income when they can’t.

But African Bank will continue to require proof of income, Maluleke says.

“Having just come out of curatorship, our standards are very rigorous. We definitely can’t afford to be seen as the lender of last resort, the lender that will give you money when no one else will. Historically that image was there but I think it’s starting to change. We are definitely a more stable bank than what we have been historically.”

Focus on auditors

There have been several scandals involving poor corporate governance and fraud in South Africa over the past year. In these cases, as was the case with the collapse of African Bank, the role of auditors has come under scrutiny.

Just recently, Deloitte was hauled in for a disciplinary hearing after the conclusion of a four-year long investigation into its auditing of the African Bank financials before its collapse. The new African Bank has settled on PwC as its external auditors after a rigorous appointment process.

This week two KPMG partners stepped down ahead of disciplinary hearings related to work done for VBS Mutual Bank, which is being investigated by the Reserve Bank for fraudulent reporting and transactions. This comes after an institutional overhaul of KPMG in September when the firm’s role in facilitating state capture was called into question.

Maluleke expresses concern about the turmoil in the auditing profession.

“I do think they need to do a proper cleansing. That’s the thing, you are not having an honest conversation as a profession. You are going to fix at the edges and things are going to continue to go wrong. There is a fundamental issue … [they need to say] ‘this is how we are going to fix it’.

“What we are trying to figure out as an organisation is how do we become part of that conversation, because it affects us as well.”

The Viceroy effect

A report by the little-known research firm, Viceroy, caused panic in the market when, after a damning report on retailer Steinhoff cooking its books, it claimed Capitec was rolling over loans to hide nonpayment.

The report was quickly dismissed by Capitec, the regulators and the market for being marred by inaccuracies and so had little effect on the banking sector’s market performance as a whole.

But it did have an effect on board oversight and, at African Bank, it prompted a review of the bank’s credit and underwriting policies and of other related issues raised in the Viceroy report.

“No business is perfect because nobody is perfect; people get things right, people get things wrong, businesses fail,” Maluleke says. “The key thing for us as a business is, can we, hand on heart, say we are treating customers fairly, can we, hand on heart, say we are complying with the regulations that are out there. It was an opportunity to revisit those things, and we did.

Building trust

As the first black female to head a South African bank Maluleke says: “I would prefer for that not to be the main narrative but I also appreciate that it is such an important narrative … and it’s not up to me what I want.

“The public wants to believe transformation is happening. Transformation must happen. This is important for the country. We must get it right and it must give rise to greater transformation.”

At its most basic level, being a woman on top means there are obvious things that Maluleke must endure, such as comments about her wardrobe and her preference for pumps rather than uncomfortable heels.

More challenging is building trust.

“You know when you walk into a room you are going to be challenged about every single thing, so you arrive and you must be ready to be challenged on every single thing, because that what it means to be a woman; [it] is that you are consistently having to rebuild trust. People don’t automatically take it on faith that you are competent.”

But morale at the bank appears to be high. An employee engagement survey found 48% of African Bank staff are prepared to go beyond the call of duty, which is higher than the average score of 35% for other corporates. The transactional banking offering also saw an unexpected 33% of the bank’s employees sign up in the first week, Maluleke says.

“It’s nice to be part of an organisation that’s changing really quickly. You feel you are part of something bigger.”