I’VE HAD AFRICA on my mind this week for a few reasons. Closest to home, we’re in full swing pulling together IFR’s eighth annual African Capital Markets Conference scheduled for October 16 in London, which I’ll be chairing. As the title suggests, we’ll be focusing predominantly on capital markets activity, but we’ll also be delving into the African banking sector, in particular its ability to finance growth.
Of course, there’ve been some heady developments in recent days. We’ve had the collapse, rescue and recapitalisation of African Bank (and that extraordinary outburst from a former board member about clients who defaulted on their loans); Moody’s related downgrade of South Africa’s leading banks – which drew an irritated response from the South African Reserve Bank; and on the more positive side the acquisition by Bob Diamond’s Atlas Mara of ADC African Development Corp, the Frankfurt-listed pan-African banking group, which completed this week.
With Bob Diamond’s outfit having already acquired BancABC – which has ownership links to Union Bank of Nigeria – the stage looks set for the firm to set sail towards its strategy of building a continent-wide capability. Atlas Mara sold US$300m worth of shares to finance its takeovers. With a US$200m debt facility in the bag and US$325m of IPO proceeds, Diamond won’t stop here.
I won’t even ask what senior management thought was going on. Did no one bother to do any due diligence?
ON THE COLLAPSE of African Bank, the 511-branch bank-cum-furniture retailer, I will say just this: what the hell were shareholders, bondholders, the local regulator, the auditors, various debt and equity underwriters and the bank analysts who cover the company all doing while the bank was massively building out its unsecured retail lending platform so recklessly that it sent the bank over the edge into the abyss? I won’t even ask what senior management thought was going on. Did no one bother to do any due diligence?
And by the way, it’s no good people saying that the central bank did a good job in resolving the situation quickly and decisively: the troubles should have been picked up prior to the debacle. In a case eerily reminiscent of Banco Espirito Santo, the bank only completed its R5.48bn rights – which was heavily oversubscribed – in December 2013, equivalent to a chunky US$532m at the time. That’s no small beer. Did none of the shareholders – who were all wiped out – think to do a deep dive prior to committing so much cash?
Check out the shareholder list – there are some venerable names in there. Supposedly savvy independent fund manager Coronation Asset Management was a 22% shareholder prior to the collapse, while the government’s own Public Investment Corp – which got roped into the R10bn good-bank recap along with the country’s major banks – held a 12.51% stake. As key stakeholders, shouldn’t they have been watching more closely?
Coronation remarkably said it was surprised by the bank’s announcement that it needed R8.5bn of capital to stay afloat. The statement it put out about its exposure was shocking in its disingenuousness.
Should Goldman Sachs, sole bookrunner on the rights offering, bear any responsibility? That’s perhaps a tougher one to argue, given the rights offering was intended to strengthen the balance sheet, but still.
What about the debt underwriters? African Bank is a fairly well-known borrower and was a regular visitor to the Swiss franc and US dollar bond markets under its EMTN programme. The bank came as recently as February 2014 with a SFr165m 5% due 2018 offering, having previously printed SFr105m in September 2013. What kind of due diligence did bookrunners UBS and Credit Suisse engage in before placing the paper?
And did investors pile in blindly just because they could pick up some yield? Senior unsecured creditors can count themselves lucky that they only got hit with a 10% haircut. They could – and arguably should – have been a lot worse off. Did no one think to look into the use of proceeds of those bond issues or, even if they did, worry that those proceeds were being liberally sprinkled with seemingly little risk analysis onto people who had neither the wherewithal nor the intention of repaying their loans?
ON A BROADER level, were the problems of African Bank systemic or idiosyncratic? The market has tended to think see the saga as related solely to African Bank. Moody’s actions in downgrading the country’s leading banks (Standard Bank, First National Bank, Nedbank and ABSA Bank) clearly tell a different story. The rating agency also recently downgraded Capitec Bank on concerns about what it saw as risky consumer lending – concerns the bank’s CEO and the Reserve Bank said are misplaced.
The Reserve Bank was not happy: “While the SARB respects the independent opinion of rating agencies, we do not agree with the rationale given in taking this step, nor do we agree with the assessment it is based on … Once again, Moody’s refers to a lower likelihood of sovereign systemic support based on decisions taken recently in relation to African Bank Limited (African Bank). This concern stands in sharp contrast to the support actually provided by the SARB …
“With a capital adequacy of 14.87%, of which Tier 1 capital comprises 12.05%; a financial leverage multiple of 13.43; impaired advances to gross loans and advances of 3.57%; and a return on equity of 14.25%, the South African banking sector remains healthy and robust,” SARB noted.
Oh and finally to that extraordinary outburst. Interviewed by local media, Tami Sokutu, former African Bank board member, COO, director of risk, compliance and sustainability of retail lending, the man responsible for the retail credit expansion and an ostentatious flouter of his own wealth, said of the sub-prime borrowers who defaulted on their loans, just ahead of his Scottish golf trip: “F*** them, f*** them”.
He clearly missed the course on customer care. Needless to say, the bank issued a statement disassociating itself from those comments, although I suspect deep down management was thinking exactly the same thing!
