African Bank Needs Depositors as Business Model Fails

African Bank Investments Ltd., the failed South African lender being rescued by the central bank, needs to attract depositors to finance lending as risks increase that equity and bond investors will shun it after losses.

African Bank may need to offer consumers interest rates of as much as 15 percent, according to Chris Gilmour at Absa Asset Management Private Clients. That compares with a top rate of 9 percent at Capitec Bank Holdings Ltd., a competitor in unsecured lending that began taking retail deposits in 2002.

Abil, as the bank is known, spiraled toward collapse last week after saying it needed to raise at least 8.5 billion rand ($800 million) to survive, causing the stock to lose most of its value in three days and bond prices to fall by more than 50 percent. The Central Bank will split the business to create a bad bank with soured loans, while a group of lenders agreed to underwrite a 10 billion rand capital raising for the good bank.

“Our desire to fund the new, good bank is very, very limited,” Conrad Wood, head of fixed income at Momentum Asset Management, which holds Abil debt, said by phone from Johannesburg on Aug. 12. “That Abil will need to take deposits is valid. I’m not sure of the success rate they’ll have, but retail deposits will have to form part of the new model.”

For 15 years African Bank loaned money to low-income earners who didn’t have collateral, funding the business by raising money in debt or equity markets because it didn’t take deposits. With investors now facing losses, the central bank said Aug. 10 Abil needs a “strategic rethink” of its business.

Unique Problems

“The problems that have beset African Bank are, in our view, largely specific to their current business model, which does not include a diversified set of products and income streams,” Gill Marcus, governor of the South African Reserve Bank, said Aug. 10. “This has made African Bank and the Abil Group uniquely vulnerable to a changing or challenging business environment.”

Market conditions deteriorated in recent months as 25.5 percent unemployment, rising inflation and mining industry strikes cut South African borrowers’ ability to repay loans carrying interest of as much as 60 percent a year. The bank was also weakened by the failed Ellerine furniture business, which needed at least 70 million rand in funding a month.

Abil had 101 million rand in depositors money at the end of May, according to data from the central bank, which made an “unequivocal commitment” to guarantee the funds’ return. Unlike the U.K. and U.S., the country doesn’t have depositor insurance.

Depositor Protection

“To attract savings Abil would have to beat Capitec and that may mean rates of 12 percent or 15 percent or more,” Absa’s Gilmour said yesterday by phone from Johannesburg. “Maybe if South Africa had institutionalized depositor protection, that would help. Without that I don’t know how Abil would get deposits and not pay astronomical rates.”

African Bank went into administration on Aug. 10 with at least 33 billion rand of debt and interest due, according to data compiled by Bloomberg. Shareholders, who were invested in a company with a market cap of 10.3 billion rand just five days before, were left with a lender valued at 465 million rand by the time Abil went into curatorship, akin to Chapter 11.

Owen Nkomo, founder of brokerage Inkunzi Investments Ltd. and Simon Brown, head of JustOneLap, an investment training website, said Aug. 10 they won’t invest in the “good” bank.

“I won’t take a punt because I have a long memory,” Brown said.

Bonds Suspended

African Bank long-term deposit and senior unsecured debt rating was lowered to Caa2 from Ba1 by Moody’s Investors Service yesterday, citing the “expected losses” for senior bondholders and wholesale depositors. The bank is on review for a possible downgrade because of the risk of higher than anticipated losses.

Abil’s debt holders may not be paid when 1 billion rand of bonds mature next month, Tom Winterboer from PricewaterhouseCoopers LLP, who was appointed caretaker of the bank, said by phone from Johannesburg today.

“The September bonds are suspended for now -- we need to get a better handle on things first,” he said. “Interest is being suspended. The 10 percent haircut for senior bondholders is on the interest and the capital.”

Abil’s closest competitor, Stellenbosch-based Capitec, which also provides loans not backed by assets, started taking deposits in 2002 and hasn’t sold debt to boost funding in more than a year, according to data compiled by Bloomberg.

Deposit Rates

Capitec’s retail deposits rose to 23.6 billion rand by February. The interest rates on deposits range from 4.4 percent to 9 percent for fixed-term savings accounts of 100,000 rand and more over at least 49 months, according to its website.

African Bank started a retail savings product in 2012 and attempted to sell it more aggressively by bundling it with personal loans and insurance products last year. It offered interest rates of more than 10 percent on some fixed deposits, according to its website.

“I remember checking various bank’s interest rates back in varsity days,” Gilmour said. “There was a direct correlation between high rates and the riskiness of the bank.”