MIDRAND – African Bank Good Bank, which will start operating in February, will be viable even with significant reductions in the maximum interest rates chargeable on unsecured loans. The bank will also comfortably operate after expected caps on credit life insurance are put in place, said curator Tom Winterboer on Wednesday.
The National Credit Regulator (NCR) proposed in June that the maximum prescribed rate on unsecured loans drop from 32.6% to 24.78%, eliciting warnings from lenders that high-risk borrowers will see credit access curtailed.
Winterboer confirmed that drops in interest rates would have certain “unintended consequences” for African Bank and others, with lending to higher risk groups ceasing, loan volumes falling and loan durations shortening.
He said that African Bank’s revised business plan is based on the assumption that the proposed reductions were implemented at the beginning of this month. The South African Reserve Bank (Sarb) has endorsed the plan, Winterboer said.
In addition to lower lending rates, African Bank’s revised business model is based on a credit life charge of R4.50 per R1 000 loan, Winterboer added. This is in line with what the NCR has previously pegged as an acceptable rate.
Winterboer was speaking to media at the launch of African Bank’s information memorandum, which details the proposed offers to its creditors and the way forward for the bank.
As expected, senior unsecured debt holders will exchange 90% of their investment for new Good Bank senior debt instruments, at the same interest rates and an extended maturity.
Subordinated debt holders, where their mandates allow, can participate in the restructured Good Bank as equity holders, said David Gard, a member of the curatorship team.
Alternatively, they can choose to have up to R1.65 billion, or just 37.5% of their claims, settled by exchanging these claims for alternative debt instruments in Good Bank.
Shareholders will have to wait for the bank to relist before recouping investments, but may lose everything.
Gard said that material holders of senior and subordinated debt have given oral support to the proposals.
Sarb to lend Good Bank money
It’s been more than a year since African Bank was placed into curatorship, after it collapsed under a mountain of bad debts in August 2014.
Together with a consortium of six South African banks and the Public Investment Corporation (PIC), the Sarb underwrote a R10 billion capital raise at the time and separated African Bank’s performing loan book (Good Bank) and its non-performing loans (Residual Book).
In addition to a 50% participation in the R10 billion capitalisation of Good Bank, the Sarb will now also provide an indemnity of up to R5 billion against possible claims on Good Bank, as well as a R4.3 billion loan to African Bank.
Good Bank will continue to collect on the Residual Book, which recoveries will be used to support the Sarb’s contributions.
“On listing, the intent would be for the Reserve Bank to sell its [50%] shareholding,” said Gard, who explained that the Sarb’s loan is given on commercial terms and neither the State nor taxpayers should be suffering any losses as a result.
The new banking group, which will house the restructured African Bank and insurer, Stangen, will launch on February 1.
Effective next month, African Bank will buy Stangen from its former parent, African Bank Investments Limited (Abil) for around R1.4 billion and then sell the insurer to the new banking group for the same amount.
Profitability expected in 2017
African Bank is expected to have an opening cash balance of R20.5 billion, which will prevent it from having to raise debt until October 2018, Gard said.
The new banking group is expected to post a R336 million loss for the financial year to September 2016, recording a profit of R542 million in 2017, Winterboer said.
The curator predicts that this will climb to a profit of R932 million in 2018, which he said was a “base case”.
The bank will publish results for the year to September in December.
Winterboer remains upbeat about African Bank’s prospects, pointing to its improved credit granting criteria and increased provisioning for bad debt. Under the leadership of CEO Brian Riley, chairman Louis von Zeuner and a board with equally extensive financial services experience, Winterboer believes the new bank is in good hands.
He said it would need to develop a track record for about three years before listing and that if there’s an over-subscription on listing, previous shareholders will get preferential treatment on a yet to be determined basis.