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Rescue plan for African Bank

By Sapa | Aug 11, 2014 | COMMENTS [ 8 ]

A consortium involving major banks will inject R10 billion into the embattled African Bank Investments Limited, Reserve Bank Governor Gill Marcus said on Sunday.

"The consortium has committed to underwrite a R10 billion capital raising, and will be engaging with shareholders and other participants in this regard," Marcus told reporters at the SA Reserve Bank in Pretoria.

The consortium comprises of Absa Bank Limited, Capitec Bank, FirstRand Bank Limited, Investec Bank Limited, Nedbank Limited, Standard Bank Limited and the Public Investment Corporation.

She said that private/public sector partnership would lead to the African Bank splitting into two.

"On one hand a good bank, which will be recapitalised. Let me emphasise that the R10 billion recapitalisation is for the good bank which has a book value of R26 billion net of portfolio impairments," said Marcus.

"On the other hand we have the bad book, which comprises a substantial portion of the non and underperforming assets, which will be housed in a vehicle with the support of the SARB in order to separate these from the good bank."

She said the bad book would no longer be part of African Bank.

"The bad book currently has a book value net of specific impairments of R17 billion for which the SARB will pay R7 billion. Collection against the bad book will continue and indeed strengthened.

"There is no payment holiday for anyone on a loan from African Bank," said Marcus.

She said collection of funds owed to African Bank would continue with the goal of avoiding costs to the South African taxpayer arising of the rescue intervention measures.

Earlier, Marcus announced that the African Bank Investments Limited (Abil) had been placed under curatorship.

"The first important measure has been the conclusion reached by the Registrar of Banks and the decision by the minister of finance to place African Bank under curatorship with effect from 4pm today," said Marcus.

"African Bank Limited board has, after due consideration, advised the registrar that it does not oppose curatorship and has taken the appropriate resolutions to facilitate the process."

She said Tom Winterboer was appointed as the curator.

"Tom Winterboer is the financial services industry leader for Africa and a member of the global financial services leadership team at PwC (PriceWaterhouseCoopers),"said Marcus.

He would be assisted by a team of experts including Peter Spratt and David Gard of PwC London. Other team members would be announced by Winterboer.

Among many Abil's woes, Marcus said in a six month period to March 2014, the institution posted a headline loss of R3, 1 billion.

"They assured the market that the book written after June 2013 was significantly better and forecast that they would return to profitably in the second half of the year," she said.

Abil's trading statement for the third quarter released on August 6, 2014 was markedly worse than what was expected, with an estimated headline loss for the full year to September 2014 financial year of R6, 4 million.

African Bank's shares plummeted last week after it warned of massive losses and said it needed about R8.5 billion in new capital.

Marcus said African Bank serves 3, 2 million people.

In a joint statement, the Financial Sector Campaign Coalition (FSCC) and the South African Communist Party (SACP) said they were not surprised by the news of the loss of market value experienced by African Bank.

"We are not surprised because we both warned and campaigned against reckless and unsecured lending financial practices that cause debt trap and distress in households and crisis in the economy," said the joint communiqué.

"Reckless lending practices must come to an end. Rather than support practices that cause crisis, the Reserve Bank must combat such practices and prove to be independent from private financial interests."

Abil is the largest provider of unsecured loans in South Africa.

COMMENTS [ 8 ]

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speru5

One of the banks that I just do not understand. Does this means the banks which inject the amount will benefit somehow from this rescue plan? Or maybe they will want to have shares

Aug 11, 2014 7:34 | 1 replies

Pointman

I don't think all the details will be made public. The banks most probably had their arms twisted by Gill Marcus to pump in the money. Also since it is a rights offer they will get shares in ABIL and hopefully those shares will be worth something in a few years. Also some of these banks most probably lent money to ABIL money to conduct their micro lending and they would have lost that money if ABIL went bust.

Aug 11, 2014 7:47 | 0 replies

Tpaz!!

"There is no payment holiday for anyone on a loan from African Bank," said Marcus. I hope @Sinudiety is listening.

Aug 11, 2014 7:55 | 1 replies

ytieduniS

Tpaz!! - Im debt free, nor would I do business with African bank.

Aug 11, 2014 8:10 | 0 replies

D-zel_3.0

I suppose this arrangement makes sense, it makes sense that the performing book be stripped out of ABIL and that part of the business to continue as a going entity as it still has tradable value and the outstanding loans are collectable. I was worried about the non-performing book; at 17 billion it is substantial and I suppose R 7 billion could be considered far value but how is SARB going to collect the outstanding amount given that these are people who just aren’t servicing their debt for whatever reason and these are the guys that sank the bank in the first place.

Given the number of jobs on the line I suppose government had to come up with a bailout plan but I am not sure of the maths though; R 10bn for a performing book worth R 26 bn vs. R 7bn for non-performing loans worth R 17 bn. Let’s hope people don’t take advantage of who the creditor is and the non-performing book is turned around. Call it what you want but are we witnessing the first move in the nationalisation of a bank by our government in line with EFF policy though in this case fair value was paid for the shares?

The more interesting question is is this government’s strategy to enter into the banking sector and particularly the credit market and are we going to see the nationalised bank venture into housing finance etc?

Aug 11, 2014 10:43 | 1 replies

grunt

Interesting post D-zel. Whether it is nationalisation or not is debatable, but I believe that banks can play a massive role in helping people out of poverty, prudent lending to assist in small start up business, or buying a house which is the start of creating wealth, etc, so there shoudl be a state bank that is aimed at playing such a role rather than maximising profit for shareholders ( i.e. actually the enemy of the client ). If the state takes over a struggling bank in this manner, rather than nationalising the commercial banks, it is the perfect way to introduce a stae role in banking. Problem just always - how to make sure they put the right people in charge ?

Aug 11, 2014 11:12 | 1 replies

D-zel_3.0

My concern is this is not a deposit driven bank i.e. does not offer transactional banking nor is it driven by savings and deposit hence government will have to fund the entity every time it gets into trouble. ABIL requested R 5 bn from investors last month or two months ago and now they needed a further R 8bn to close the gap between the balance sheet and its liquidity position.

Secondly impairments are a serious issue in banking as a whole but in a business that is reliant on repayments being made in order to keep the entity liquid and trading as a going entity it is fundamentally critical. My concern is once they enter into the housing finance market for example how do you ensure repayment of borrowed funds and what remedies do you have in the event of non-payment; do you repossess the houses and kick affected families onto the streets and if you do this what is the political cost to the government of the day and is that a risk they will be willing to take? Do you list these individuals but let them stay in the houses in which case you are not doing much to recoup the outstanding debt? How do you ensure repayments from those you’ve learnt money?

For banks a 5% non-performing loan book is acceptable, at 10% is dangerous and 15% threatens the existence of the entity; with a government owned bank this may balloon to up to 30% and more; no business can operate with such a high default rate and where would the money for further loans come from?

To fund 10,000 loans at an average loan mount at R 600k you need R 6bn, this is serious money we are talking about and how do you price for this risk without overburdening your customer who happens to be a bad customer if we were to use a broad definition of customer at the point of scoring.

The only way I see this working is if they redefine the funding model from funding complete units keeping in mind that supply of housing in the gap market is lacking or do you fund buying building materials thorough pre-selected retailers where prices can be negotiated through government or the bank and you allow communities to build their own houses and pay for the labour costs incurred but going 100% in into funding completed units is too risky in my humble opinion. Give people stands so they can build houses for themselves is what I say, this is the cheapest, quickest and most efficient way to deliver houses in my opinion.

Aug 11, 2014 11:49 | 0 replies

s.cold

THEY EVEN KNOW MY NAME THERE,,,NGIHLALA NGI CLEANER IMALI YAMI KHONA

Aug 11, 2014 11:13 | 0 replies