The rescue of African Bank has been one of the Reserve Bank’s greatest success stories. But it brought a big headache: how to get out of it without too big a loss. Last week it said its preferred exit strategy is an initial public offering. It is going to be hard.
It is easy to forget just how serious the collapse of the bank was back in 2014. It was unusual in that it raised cash in the money markets instead of from deposits. As the bank headed for trouble, a run was triggered on money market funds, even though African Bank paper was a small part of these. The run potentially meant these funds had to pull funding from the rest of the banking system, setting the stage for a contagious financial crisis.
The National Treasury and Reserve Bank had to act fast. The rest of the banking sector, plus a set of international experts, was summoned to help — it was in all banks’ interest to find a solution. The result was unprecedented in SA’s banking history but drew inspiration from international rescues, particularly after the financial crisis.
African Bank was split into a “bad bank” and “good bank”. Its worst loans were put into the bad bank, along with all shareholders and all subordinated creditors. The senior debt holders went into the good bank but took a 10% haircut, along with the handful of depositors.
In an unprecedented step, the Reserve Bank, the Government Employees Pension Fund (GEPF) and the six other largest banks all agreed to refinance the good bank, pumping in R10bn of new equity, with the Bank contributing half of it. The Reserve Bank and commercial banks are also on the hook to underwrite R8.3bn of funding until the end of March 2024.
That stabilised the system. Shareholders in African Bank, including thousands of poor black shareholders and many who pumped in billions shortly before its collapse in a vain attempt to save it, lost everything. Preference shareholders and subordinated debt holders received an interest in the bad bank and the possibility of recovering money if it could recover the bad loans (as it turns out, they’ve received more than I think they could have hoped for).
The good bank went back into business, saving jobs and ensuring that clients who depended on it could continue to be serviced. Five years down the line, the bank is trading profitably.
But it immediately presented a headache. Its shareholder structure consisted of its regulator, with another 25% held by its competitors. The conflicts of interest are obvious. The GEPF owns a quarter. The international precedents suggested they might be able to make a profit — the UK government managed to do that with Northern Rock and Bradford & Bingley but no-one expects that with African Bank.
The ownership structure made African Bank the safest bank in the land. As it stabilised its funding, it had to find new cash to settle the bond holders who were keen to realise the 90% they held from the old African Bank bonds. The bank resumed trading with bonds of R31bn, which has since whittled down to R3.3bn.
To fill the gap it has been raising deposits, which it has built steadily to R13.1bn. It has also tentatively begun issuing new debt, with a three-year floating rate bond in 2021. The sustainability of this approach is one concern I can imagine investors having — just how sticky are African Bank’s deposits without the current shareholder structure?
The Bank has been attempting to sell African Bank to a single buyer, a much neater way to exit, but it hasn’t been able to find any serious offer it considered acceptable. It has also fended off an attempt to turn African Bank into the state bank much desired in corners of the ANC.
There is apparently a lack of appreciation in political circles that the Bank and other banks would want to get back as much as possible of their R10bn of equity. The Bank has written down its exposure to R3.5bn, but it is not going to give that away. Then there is the funding commitments that its existing shareholders have made that African Bank is going to want from somewhere.
All told, the IPO that the Bank now says is its preferred exit route, is going to be tricky. Banks are not well rated by the market, thanks in large part to the Covid-19 pandemic. Most struggle to trade at a price:book ratios above 1 — implying that they are worth less than the equity on their balance sheets.
Back in 2019 you could be confident of a price:book between 1 and 1.5. Plus the specifics, including whether it will keep the funding guarantees that it gets from its shareholders, are going to be critical to anyone thinking of investing through an IPO.
This is not something that will happen quickly.