African Bank’s new route to the JSE

Potential investors and the current shareholders – the South African Reserve Bank (Sarb), the Government Employees Pension Fund (GEPF) managed by the Public Investment Corporation (PIC), and the consortium of banks coerced by the Sarb to recapitalise African Bank when it ran into trouble back in 2014 – will have to wait another few years before African Bank lists on the JSE.

The Sarb has been getting increasingly uncomfortable about owning 50% of a bank it has to regulate, eventually getting African Bank to aim for a listing on the Johannesburg Stock Exchange (JSE) in 2025. However, African Bank CEO Kennedy Bungane revealed in the latest annual report that current results and market conditions are not conducive for a listing now.

Read: African Bank delays JSE listing

He noted that the bank will potentially list based on the results for the financial year to September 2027, indicating that the listing has been postponed to 2028. This date is also subject to favourable market conditions and, more importantly, that African Bank achieves most of its ambitious growth targets.

Read/listen:
African Bank to list on the JSE
African Bank delays JSE listing

Anbann Chetti, chief financial officer of African Bank, says the board and management agreed that the prudent approach was to bed down the most recent acquisitions and other initiatives aimed at growing African Bank and then list a larger business in several years’ time.

“We have been growing African Bank into a fully fledged bank, which is very different from the old entity that provided largely unsecured lending,” says Chetti.

“The bank is now a completely different business. Previously, African Bank offered personal, unsecured and largely short-term loans, funded by wholesale funding totalling R40 billion at the time.”

People will remember that African Bank actually started off as nothing more than a microlender providing payday loans before it registered as a bank. It ran into liquidity problems in 2014 and was placed under curatorship when wholesale funders refused to renew their investments amid growing risks and governance failures.

At the time, more than 90% of the funding was in the form of wholesale funding from large investors for relatively short periods.

Banks

The Sarb facilitated a deal to recapitalise African Bank to the value of R10 billion.

The Sarb put in R5 billion in exchange for a 50% shareholding, and the PIC invested R2.5 billion on behalf of the GEPF for a stake of 25%.

A consortium of six South African banks hold the remaining 25%. FirstRand owns 7%, Standard Bank 6%, Absa 5%, Nedbank 4%, Investec 2% and Capitec 1%.

It could be argued that they would have preferred to invest this capital into their own businesses over the past decade, judging from the Sarb disclosing in its latest annual report that it wrote down its 50% investment in African Bank to R3.5 billion – a valuation decrease of 30%.

This values African bank at R7 billion, equivalent to a price-earnings ratio of nearly 14 times given the earnings of R523 million in the year to end September 2024.

Chetti says African Bank has meetings with these “reluctant” shareholders from time to time.

“We are competitors after all. For example, when we grow our customer base, it is at the expense of the other banks.

“The recapitalisation was a good solution to get it out of curatorship in 2016. The Reserve Bank indicated several years ago it needs to exit its shareholding as it shouldn’t be an investor in a bank and regulate the same entity.

“The Reserve Bank initially set about looking to sell African Bank, but couldn’t find a suitable buyer. Therefore, the best solution is to list African Bank on the JSE and thereby replace the Reserve Bank’s holding,” he says.

Challenges

Listing on the JSE presents several challenges. Not least is an immediate overhang of shares from those reluctant shareholders, which includes the Reserve Bank and the consortium of banks.

“We would rather list a bigger bank with better prospects later than coming to the market now. We need to do it right to get the best value for all shareholders,” says Chetti.

“We have set ourselves ambitious financial targets and hope to come to the market with substantially higher earnings. Postponing the listing gives us time to reach our ambitious targets.”

Chetti says the bank’s operations have been bolstered by the inclusion of business and commercial banking after the acquisition of Grindrod Bank in 2022.

“Funding changes – from wholesale funding providing 100% of liquidity in 2016 to a more balanced funding model which includes retail and business funding deposits of 92% – is an important achievement.

“African Bank of today is a more diversified business, offering personal banking, business banking, transactional accounts, secured loans, mortgage bonds and savings and investments.

“Approximately 39% of the net advances are secured loans, which is set to increase after the acquisition of Eskom’s home loan book,” he adds.

Eskom book boost

Eskom recently announced that the disposal of its staff home loan book and assets housed in Eskom Finance Company to African Bank is going according to plan. Subject to the usual conditions and approval by regulators, the deal should be concluded within months.

Acquiring Eskom’s home loan book will give African Bank’s balance sheet a boost, as well as giving the bank the potential to offer these property owners other banking services.

African Bank’s annual report discloses that the bank has 5.4 million clients, of which 1.5 million have transaction accounts for day-to-day transacting.

Chetti says African Bank is working on building a pool of new shareholders. The first step was the introduction of employees in the form of a staff incentive scheme.

The staff scheme will hold 10% of the shares, diluting the existing shareholders. The GEPF has indicated its intention to remain as a strategic investor.

Valuation

Management’s intention is to grow earnings from the current circa R500 million to R2.5 billion.

Except for Capitec’s very high rating, bank shares are currently trading on price-earnings multitudes of around eight times. A similar rating will value African Bank at R20 billion, if its big plans can get the earnings up to R2.5 billion.

Listen: Diversification, acquisitions help lift African Bank’s financials

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