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African Bank placed under curatorship

Sarb to buy “bad” book for R7bn.

PRETORIA – The South African Reserve Bank (Sarb) has placed African Bank under curatorship with immediate effect, announcing a R10 billion recapitalisation for the “good” bank, which would be provided by private sector firms, including Capitec Bank. 

The announcement follows a third quarter trading update issued on August 6, where African Bank Investments Limited (Abil) flagged an expected headline loss of R6.4 billion for the year to September 30. The unsecured lender also said it would need a minimum R8.5 billion capital and announced the resignation of chief executive Leon Kirkinis. 

Addressing media on Sunday afternoon, Reserve Bank Governor Gill Marcus announced that PwC financial services leader for Africa, Tom Winterboer had been appointed as curator.

Marcus said the curatorship was part of implementing a resolution plan “capable of ensuring that the business of African Bank gains a secure perspective for the future as a lending institution with a transformed business model”.

The decision was taken by the Registrar of Banks, Rene van Wyk, in consultation with the Minister of Finance, Nhlanla Nene. The curators would be paid from Abil’s revenue stream and Marcus said their payment would be closely supervised, although there was no time limit on the curatorship. 

She emphasised that African Bank remained opened for business and said Winterboer, who would “be in the bank tomorrow morning”, would make decisions regarding the continued granting of loans and sound banking activities generally.

Sarb buys the “bad” book

Part of African Bank’s rescue involves the purchase by the Sarb of a substantial portion of the non- and under-performing assets and other high-risk loans from African Bank in order to separate them from the “good” bank.

The “bad” book currently has a book value net of specific impairments of R17 billion, for which the Sarb would pay R7 billion. “Collection against the bad book will be continued, and indeed strengthened: there is no payment holiday for anyone owing on a loan from African Bank,” Marcus said.

“Every effort will be made to ensure that collections continue with the goal of avoiding any cost to the taxpayer arising out of this measure. A claw back arrangement will be put in place for the bad book to the extent that performance exceeds expectations,” noted Marcus.

“Good” bank restructured

A consortium of private sector players has committed to underwrite a R10 billion capital raise for African Bank. The consortium comprises Absa, Capitec, FirstRand, Investec, Nedbank, Standard Bank and the Public Investment Corporation (PIC). Marcus said that current shareholders and subordinated debt holders would be provided with an opportunity to participate in the recapitalisation of the new entity, i.e. the “good” bank, which had a book value of R26 billion net of portfolio impairments.  

“The consortium has offered management and technical skills to reinforce skills required under the curatorship,” she noted.

She said that retail depositors represented less than 1% of African Bank’s creditors. “We are therefore able to make an unequivocal commitment to all existing retail depositors that their money is safe and that they can continue with African Bank as their bank without fear that their deposits will be frozen or lost,” she said.

Marcus explained that existing retail depositors and specified sundry creditors would be transferred into the “good” bank at full value. Senior debt instruments and wholesale deposits (excluding subordinated debt holders) would be transferred at 90% of face value following the restructuring.

The clients of fund managers that had invested with Abil, which include Coronation and the PIC, would be the ones to take a haircut on their investments, Van Wyk said in response to a question.

Ellerines

Abil announced that it had placed Ellerine Furnishers, a wholly owned subsidiary of Ellerine Holdings, into business rescue on August 7. Marcus said that the business rescue process brought to an end the R70 million minimum monthly funding support Abil had previously provided to Ellerine Furnishers.

Moral hazard risk?

“While we do not see systemic risk in this, we would be conscious that any bank that fails has risk to it,” Marcus said. “It’s not that we didn’t see it coming, we saw the weaknesses… measures that needed to be taken were not done in the manner that was required or to the extent that was required.”

According to Marcus, Van Wyk and his team intensified active engagement with the management and board of Abil towards the end of 2012. “The concerns they expressed particularly focused on African Bank’s impairment and provisioning policy, its rapid credit growth, and the need for a strategic rethink of its business model,” Marcus said.

She noted that the governors held regular meetings with the Banking Supervision Department since May 2013 on the steps they required African Bank to take in addressing the concerns. “The measures taken by African Bank as a result of this engagement included a higher level of provisioning for non-performing loans, a review of its provisioning policy, and a rights issue that raised R5.5 billion in December 2013. The management was also requested to dispose of Ellerine Holdings,” Marcus noted.

Considering that African Bank at that stage had a capital adequacy ratio of 32%, which is above the minimum requirement, Marcus said the Sarb was satisfied that the R5.5 billion capital raise was sufficient.

Whether or not Abil would be suspended from trading on the JSE, Marcus said, would be a decision taken by the stock exchange in consultation with the curator. However, she said it was intended that the “good” bank holding company would be listed on the JSE in due course and would include the acquisition at fair value of the various insurance entities within the Abil Group.

Marcus said the Sarb would use the lessons from Abil to see whether there were things that could have been done better (on the part of Abil management), as well as what the regulator itself had not catered for.

Marcus was comfortable that the Sarb’s actions did not create a precedent for other banks to behave recklessly in the hopes that Pretoria would come to their rescue. “We are always conscious of the moral hazard, but I don’t think that would be a result of the steps we’ve taken here,” she said.

She stressed that the need to promote access to finance and financial inclusion was precisely why it was important to rescue the “good” bank. “Our responsibility is to the system and the bank as a whole and to ensure Abil’s 3.2 million clients have access to finance,” Marcus said.

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