STUART THEOBALD: Different processes at work in restructuring of African Bank and Land Bank

The bigger problem is that the future business model of the Land Bank is highly uncertain.

This column was first published in Business Day.

SA’s financial authorities are pretty good at rescuing banks. Or at least they used to be.

In the same week that creditors who lost money in the restructuring of African Bank were granted another R400m from the wind down of the residual book, Land Bank creditors were shocked when the National Treasury took off the table a partial guarantee for restructured debt in the distressed state-owned bank.

These were unilateral changes to the proposed restructuring of the agricultural bank, after nine months of negotiations. Meanwhile, African Bank’s original creditors are doing better than many could have expected, having received R3.7bn of cash from the bad book.

These two processes are starting to look like night and day. What gives?

The main answer is that only one of these was a real bank. Only one was subject to the regulations of the Banks Act and overseen by the Reserve Bank. When African Bank wobbled, the Bank moved in full force, beginning with a period of enhanced oversight. When the decision was taken to pull the plug together with the Treasury, the Reserve Bank sought out the best bank restructuring experts in the world.

The Land Bank, in contrast, has no Reserve Bank oversight at all. Like the Postbank, Development Bank of Southern Africa (DBSA), Industrial Development Corporation (IDC) and other bank-like entities in the public sector, they operate in terms of their own legislation. It is the National Treasury that regulates and oversees them. And in the case of the Land Bank, this oversight has fallen short.

The Land Bank balance sheet is about two-thirds the size that African Bank’s was. Its financial woes are also considerably less. It defaulted on payments to bond holders in April last year, but it is not obviously insolvent as opposed to facing a liquidity crisis.

All of these should make it easier to resolve the Land Bank’s issues compared to African Bank. Indeed, the situation should never have been allowed to get into such a mess in the first place. Now that it has, we’re seeing a haphazard resolution process that risks damaging confidence among creditors to all public sector entities.

The unilateral changes imposed by the Treasury on the proposed resolution seriously undermine creditors. The original proposal, that seemed to have been a done deal, included a 60% government guarantee on the restructured debt. The restructured debt was to be in line with existing term lengths, so 13-month instruments, for example, were reset to their original maturity. The unilateral changes, however, impose a standard five-year instrument on everyone and without the government guarantee.

There are lots of reasons why this won’t fly. Many of the existing lenders are constrained by their fund mandates. A money-market fund, for instance, usually cannot invest in instruments longer than one year. They are facing having their short-term paper swapped into five-year instruments that they will not be able to hold.

But the bigger problem is that the future business model of the Land Bank is highly uncertain. As FutureGrowth, one of the bank’s main creditors, has noted, the book is tilting more towards development finance than commercial finance. This will have a different credit performance than historically and presents higher risks.

The Treasury, while acknowledging that an equity injection is important, has not put a number on the table for how much it will put in. The bank has also suffered a long period of management problems, with the current CEO having been in the role for less than a year after a string of acting CEOs in the previous two years.

Any creditor facing this outlook would be worried. The only possible way you could accept this outlook is if your risk was tightly constrained. A partial government guarantee was the only way to do this.

To my mind, the Land Bank indicates that we cannot afford to have banks that sit outside the Banks Act and subject to the proper banking authorities. This is generally recognised. The Banks Act was amended in 2018 to allow state-owned entities to register as banks. The Postbank is the most obvious candidate, though it has been trying to get into shape to meet minimum requirements for a banking licence for well over a decade. It is still struggling and instead operates under a series of exemptions granted from the act.

The Land Bank is the next most obvious candidate. Indeed, the current resolution process is missing a trick in not bringing the Reserve Bank and its restructuring expertise to weigh on the problems. The resolution could be an opportunity to reset the Land Bank for a longer-term future with a banking licence in hand.

The current resolution process also has serious implications for creditor confidence in state-owned entities more widely, as well as respect for the Treasury’s custodianship of the financial system. The Land Bank is relatively small fry compared with other government financial institutions such as the DBSA and IDC, which both rely on bond markets. As in the case of African Bank, the problems call for serious expertise to be brought in to manage it. The Treasury’s reputation depends on it.

Theobald is chair of Intellidex