JOHANNESBURG – Ratings agency Standard & Poor’s (S&P) has assigned a preliminary ‘B+/B’ global scale rating to African Bank ahead of its expected launch in April, placing the bank four notches below investment grade rating (and its domestic peers) and giving it a negative outlook to reflect the “negative economic risk trend on the South African banking system,” S&P said in a statement on Thursday.
“We assume that African Bank will operate with a diminished customer franchise, strong levels of capitalisation, inherently high cost of risk, weak profitability, and wholesale debt funding supported by at least two years of strong liquidity and government support,” S&P stated, noting that it based its preliminary ratings action on details contained in the public information memorandum.
The ratings service projects that African Bank will have total assets of R54.5 billion come April 4, which is the expected official re-launch of African Bank Good Bank (African Bank).
“The rating is not surprising, given our recent history. Ratings do not typically ascribe significant weighting to forecasts until there is real evidence of performance. This rating provides a base for Good Bank and we as management are convinced that we can enhance performance through a more diversified business model to improve the rating over time,” commented Brian Riley, CEO designate of Good Bank.
Riley has considerable plans to diversify African Bank’s products, customers and channels, but S&P said it expects the bank to remain dependent on “consumer lending and associated revenues for at least several years”.
The ratings agency estimates that African Bank will have R10.5 billion worth of non-performing loans (NPL) on its balance sheet when it officially commences operations, and that loan loss reserves will cover 80% of this.
It expects African Bank’s longer-term loan loss experience to be much higher than that of other South African banks.
“We assume the balance sheet and loan book will shrink conservatively over the next couple of years and that capital will decrease due to modest ongoing losses linked to credit losses and the negative carry from the large amounts of cash held on the balance sheet,” S&P said.
“We do not currently include the potentially high contribution to revenues by the cell captive for credit life insurance, which could represent a strong upside to the profitability of the entity over the long run.”
S&P said its rating could be lowered if “legal or operational challenges delay or change the balance sheet or operations from our above assumptions”. The negative outlook on the bank’s rating could be revised to stable “if the economic risks facing banks in South Africa lessen,” S&P said.
These risks include rising credit risks from weak economic growth and highly indebted households that are increasingly sensitive to interest rates, it said.
African Bank’s exchange offers announced
African Bank curator, Tom Winterboer on Thursday issued exchange offers to creditors of the bank, which include a proposal that they exchange their claims in African Bank for, among other things, new debt in Good Bank.
Winterboer said the release of the exchange offer and related documents is a “significant milestone” in the restructuring of the bank and the culmination of some 18 months of “intensive work and a highly consultative process with creditors”.
“I am pleased that the comments and feedback received from creditors to date have indicated support for the proposed transaction,” he said.
Creditors will now have to vote to give approval to the restructure.
Separately, African Bank parent African Bank Investments Limited (Abil) – which was placed into business rescue in June – has repaid half of the amount owing to its creditors, leaving it with R500 million left to repay, according to its business rescue practitioner, Dawie Van der Merwe.
Van der Merwe is meeting with Abil shareholders next week to discuss the way forward for the company.