No takers for African Bank

The South African Reserve Bank (Sarb) has had no success in selling its 50% stake in African Bank Holdings Limited (ABHL) and is now backing an initial public offering (IPO) – mostly likely through a listing on the JSE – as “alternative exit option”.

This was confirmed in an update by the central bank on the JSE on Monday. It comes just over nine months after the Sarb announced that the time was right to sell its shares in African Bank.

The Sarb never wanted to be a shareholder in African Bank, but ended up being the majority shareholder when African Bank failed in 2016 and the authorities thought it best to save it from demise.

The Sarb ended up with 50% and the Government Employees Pension Fund (GEPF) with 25% after the pension fund’s investment manager, the Public Investment Corporation (PIC), was convinced to stick in some capital in return for a stake of 25%.

A consortium of commercial banks were also involved in the rescue and together hold the remaining 25%. Among the commercial banks, FirstRand holds the biggest interest with 6% and Capitec the least with 1%.

Potential conflict of interest

According to Monday’s Sens announcement, as well as previous announcements with regards to African Bank, the Sarb reiterated that it “was never the intention” to hold an equity stake in African Bank for any longer that was necessary, particularly because the shareholding created a (huge) potential conflict of interest between the Reserve Bank’s role as a regulator of SA banks and that as a major shareholder in one of the banks.

In June 2021, the Sarb invited interested parties to submit expressions of interest to acquire the 50% interest it has in African Bank.

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“The Sarb has concluded its consideration of all the expressions of interest and consulted with all relevant stakeholders and regulators in this process.

“After due consideration, the Sarb has concluded that none of the interested investors would be suitable to acquire the Sarb’s shareholding at this stage,” the central bank however said in its update on Monday.

“The Sarb will continue to work closely with ABHL and the rest of the shareholders and proceed with the alternative exit option of an initial public offering (IPO). The timing of the IPO will be dependent on prevailing market conditions,” it added.

African Bank turnaround

The central bank also noted that the period leading up to the IPO will provide African Bank’s management with the opportunity to continue with its turnaround strategy.

African Bank’s turnaround efforts have led to some success.

The bank reported a net profit after tax of R534 million for the year to end September 2021, compared to a loss of R27 million in the 2020 financial year.

Return on equity recovered to 4.9% against a negative 0.3% in the prior year, despite the difficult economic environment.

However, management admits it is still not good enough.

“While encouraging, our results remain significantly lower than our 2019 pre-pandemic results of a profit of R1.2 billion,” African Bank chairman Thabo Dloti said in his statement accompanying the latest results.

“This slower return to pre-pandemic profitability levels is mainly due to a slower-than-expected recovery of the South African economy and the conservative, but necessary, stance adopted by the group towards credit advancement,” he noted.

At the time, management even let slip that it was hopeful to return to the JSE soon.

JSE listing

It might get its wish sooner than expected if the Reserve Bank and corporate advisers tempt investors with the promise of a listing to get them to exit existing investments in favour of buying African Bank shares.

It will be very interesting to see how this plays out. Investors are not known to forget and forgive companies when they have lost everything, except when there is an opportunity to make a lot of money.

But, the hurt continues in the case of African Bank. Previous shareholders have no stake in African Bank. Their investment in African Bank ended up as an investment in African Phoenix, which did not succeed in “rising” as its was supposed to.

The shares in the now unlisted African Phoenix are worth only a few cents.

The planned IPO will show what African Bank is worth. Based on its last results, the Sarb’s stake is worth R2.67 billion – if investors are willing to buy shares on a price to earnings ratio of 10 times.

Perhaps it is worth much less, to give investors enough upside to compensate for the risk they have to accept. Investors still remember the spectacular way in which African Bank failed only 6 years ago.

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