If African Bank were a rugby team, it would probably be Fiji. The bank is the underdog everyone wants to succeed, as so much effort went into saving it to avoid systemic issues in the South African banking system.
African Bank, as we know it today, is the “good” bank that emerged from the curatorship process. It is owned by the Reserve Bank, the Public Investment Corp and a consortium of local banks. This is the wounded soldier that was carried back to the hospital by its fellow fighters, with a long road to recovery ahead.
As retail depositors, it’s tempting to think African Bank was saved by the regulator (and the other banks) so that South Africans wouldn’t lose anything. In reality, African Bank was saved because of the level of wholesale deposits in its funding model, which made it highly interconnected with the rest of the banking industry. One of the key differences compared to Capitec is that African Bank wasn’t good at attracting customer deposits, so it needed to rely on issuing paper to other banks and financial institutions.
It would be entirely appropriate to question the credit analysis by the banks and institutions that went into the decision to buy that paper. But that’s a topic for a different day.
In the end the real shock at African Bank was in its accounting policies, which had a highly aggressive provisioning strategy that made the loan book look more attractive than it actually was
In the end the real shock at African Bank was in its accounting policies, which had a highly aggressive provisioning strategy that made the loan book look more attractive than it actually was. We can safely conclude this won’t be allowed to happen again, as there’s more scrutiny on the bank’s accounting than on the referees at the Rugby World Cup.
There’s been some excitement in the market about a potential recovery by African Bank, especially one that might end in a return to the JSE. At this stage, the market would welcome just about any new listing of a half-decent business. Sadly, recent financial results at African Bank were poor, and the latest transaction with Sasfin Bank is of significant concern to me.
First, we need another little history lesson. African Bank had acquired Ellerines (yes, the furniture group) in 2007 as part of a strategy to bring more customers into the group. Furniture businesses struggle to make any money without selling on credit, so the link here was obvious. Ellerines customers would be able to buy furniture they couldn’t afford using unsecured credit they certainly couldn’t afford, all while African Bank tried to paper over the cracks in its books by ignoring customers who had missed payments. Ah, life in a bull market.
Bull markets don’t last, especially for companies that overpay for acquisitions. If you read the notes from the presentation of the Myburgh report on African Bank in 2016, one of the concerns was that the price paid for Ellerines seemed to be high. This certainly wasn’t the first time a company had got into trouble from a poor-quality acquisition and goodness knows, it won’t be the last. Still, one would hope that lessons have been learnt.
To become a successful player of sufficient scale, it’s reasonable to expect African Bank to be on the acquisition trail. After all, we know exactly how it ended when the company was focused solely on unsecured lending. There have been some opportunistic plays, such as buying most of the assets and liabilities of Ubank in 2022 after that bank had been placed under curatorship in the same year. This was a small deal (R80m) in comparison with the acquisition of Grindrod Bank for R1.5bn. Grindrod Bank’s NAV at the time was R1.67bn and profit after tax was nearly R110m. It probably overpaid, but not by a terrible amount.
The much bigger concern is the R3.26bn deal for Sasfin’s capital equipment finance and commercial property finance businesses. These businesses make a horrible return on equity, with the former generating interim profits of R35m off a NAV of R2.29bn, and the latter losing R1m off a NAV of R787m.
Sasfin has been trading at a large discount to NAV, which is why the share price shot up 40% on this news. Instead of paying a discount as it should, African Bank is paying a slight premium to NAV for these businesses. Sasfin got the deal of a lifetime here, with African Bank getting worse at overpaying for deals.
As Mark Twain allegedly said: “History never repeats itself, but it does often rhyme.”
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