Five years ago African Bank was in ruins. A combination of reckless lending and a liquidity crisis pushed the unsecured lender over the edge. But five years later a different bank has emerged and is competing well in South Africa’s increasingly competitive banking sector.
Its latest financials for the year ended September 30 2018 boast that its group profit before tax was R1 453-million, up 29% from the year before. New personal loan business volumes were up 21% year on year, with retail savings deposits up by more than 200%.
About 34% of its loans were to new customers, with 88% of its disbursements to low-risk customers while 83% of loans on book were low risk.
The bank’s strategy of offering a competitive 13.33% annual return on 60-month deposits is bearing fruit. Retail deposits have grown to R1.1-billion, from a humble R144-million in September 2016.
The bank had 15 404 depositors in September, with an average sum of R72 059, in contrast to R36 881 the year before. This represented 5% of the bank’s total funding in September last year, up from 2% in 2017.
This growth, the bank said, will help it reach its target of 25% of non-wholesale funding by 2021.
The bank is aiming high, with plans to increase its non-interest revenue to more than R500-million by 2021 from R27‑million at the end of September, and to more than double its customer base to 2.5-million by September 2019, primarily through fees on transactional banking.
In March last year Standard and Poor’s (S&P) affirmed African Bank’s rating, remarking that the bank’s profitability had “improved markedly” over the last year and that this trend was likely to continue. S&P raised its rating in July.
Markus Borner, the head of investor relations at African Bank, said the bank had come a long way since 2014 and its subsequent relaunch in April 2016.
“The curatorship has turned into a success story,” he said. “Throughout the curatorship customers stayed loyal and we have managed to grow profitability in the past few years.”
Its future success will revolve around building its deposit base, rolling out its MyWorld transactional product and expanding digitally, he said. But Borner said unsecured lending would remain a significant contributor to its revenues over the medium term.
African Bank collapsed under the weight of bad debt in August 2014 and was split. The “good bank” became the new African Bank, which launched in 2016. The “bad bank”, which remains in curatorship, was renamed Residual Debt Services.
The “good” African Bank started fresh with new management and R30-billion on its gross loan book. It had to apply to the South African Reserve Bank (SARB) for a banking licence. It also realised that its past as a mono-line unsecured lender would not be sustainable.
“Unsecured lending in South Africa has not been a growth area for several years. It has slowed right down,” said Borner. The new bank decided retail banking and personal deposits, by way of savings and investments into the bank, would serve the “good” African Bank better.
At the time of the bank’s crash the Reserve Bank was its knight in shining armour. It put the African Bank into curatorship and insisted that the new bank move away from only providing unsecured lending and diversify its product offerings.
The Reserve Bank now owns a 50% effective stake in African Bank as a result of the recapitalisation it provided as part of the restructuring.
The other new shareholders who stepped in to save African Bank with an equity injection are the Government Employees Pension Fund with 25%, and the big six banks — FirstRand, Standard Bank, Absa, Nedbank, Investec and Capitec — which own the remaining 25% in various proportions.
No dividends have been paid to shareholders to date, but the Reserve Bank says its 50% shareholding in African Bank contributed R424-million to its group profits, largely offsetting the loss of R556‑million in the previous year.
The Reserve Bank’s shareholding has not been without criticism; its detractors point to the blurred lines between its role as regulator and shareholder.
But the Reserve Bank said it sees itself as a different type of shareholder. It is not a controlling shareholder and does not play an active role in the management of African Bank.
“The Reserve Bank therefore does not follow a return-maximising approach of an ordinary shareholder in African Bank, and its shareholding in African Bank needs to be viewed at all times within the context of facilitating the resolution,” the SARB said in a statement.
The Reserve Bank would not want to be a shareholder in African Bank for longer than is necessary, and will dispose of the shares as soon as reasonably practicable, it said.
“This is to limit the time of being a shareholder and a regulator to the shortest possible period,” the Reserve Bank explained. Progress in returning the bank to long-term sustainability and judgment about the market conditions needed to conduct an orderly sale would determine the precise timing.
Borner described African Bank’s relationship with the SARB as excellent, with positive engagement with the Reserve Bank as its prudential regulator.
The Reserve Bank said African Bank was not accounted for as a subsidiary, but as an investment. “To date, we have not received a dividend from the bank, but have accounted for the carrying value of the investment in our annual financial statements,” the Reserve Bank said.
It said the carrying value for the last financial year was improved by R424-million as a result of profits made by the African Bank.
Regarding possible conflicts, the SARB said it believed it had put in place adequate governance protocols to separate the shareholding role from its regulatory and supervisory function.
“This the prudential authority executes fairly and without favour or prejudice, in terms of internationally accepted standards and regulations,” the SARB said.
Though African Bank remains unlisted, Borner said it behaved as though it were listed, issuing annual reports and financial statements.
Its new digital offering, MyWorld, is aiming to disrupt banking in South Africa, compete with South Africa’s big banks and position itself as a fully fledged retail bank.
Capitec, the biggest disruptor in the banking sector in the past year, had retail deposits of R71.9-billion, compared with the R1.1-billion deposits of African Bank, which puts African Bank’s success story in perspective.
“But we are increasing our deposits, and we are highly competitive in that we currently offer the best interest earning rates in South Africa — when it comes to loans — the best in the market,” said Borner. “And we have to be competitive. We have to get in there.”