African Bank to list on the JSE

FIFI PETERS: African Bank may be making a comeback on the JSE. Back in 2014, you’ll remember, the bank went bust due to poor financial management. It had to be rescued by the South African Reserve Bank, which then led to the bank being delisted from the JSE to help clean up the mess there behind the scenes.

Things started improving for African Bank way before the pandemic, or way before even the Sarb announced yesterday that it had not been able to find a suitable buyer for its 50% stake in the bank, from which it had always intended to exit. It said as a result of not being able to find a suitable buyer for its stake the best way for it to exit could be via a potential IPO.

But to discuss the investment case of African Bank a bit further we have Kokkie Kooyman, the portfolio manager at Denker Capital. Kokkie, thanks so much for your time. First of all, do you understand what was meant by the South African Reserve Bank when it said that it couldn’t find a suitable buyer? In your view, how do you think they measured ‘suitability’?

KOKKIE KOOYMAN: It’s a very good question. Look, they obviously looked both locally and offshore, but suitability would obviously, in South African terms, mean that first it would be a long-term investor, which most investors would be. But I think to the detriment of especially foreign investors, I’m sure they would want the foreign investors to have a BEE investor with them as well. That’s really off-putting to an offshore investor who has now got to take the risk of investing, but then getting another investor in who doesn’t necessarily have the banking expertise. So I would say, I’m not sure – look, we are speculating that that was a definition of ‘suitable’ that could have done it.

But look, we must [not] lose sight of the fact that South Africa’s unemployment rate is very high. The loan growth and growth in South Africa is very low, so we are not a very attractive destination for offshore long-term capital to come here. I think it’s actually going to be a good outcome for South Africa, listing it on the stock exchange, the JSE – another listing.

It actually also gives more reporting to the South African public. It becomes more visible. So I think I’m actually glad that they didn’t find an offshore [investor].

FIFI PETERS: That ‘suitability’ word really had me thinking because in my view I felt ‘suitability’ wasn’t necessarily about who had the money or didn’t. I imagine that everybody who was bidding could afford to. But [as to] what the other factors were that made them unsuitable, I guess we’ll have to ask the Reserve Bank governor. Hopefully my colleagues in the industry will do so tomorrow during the media briefing after the MPC decision.

But the purpose of tonight’s discussion is the investment case for African Bank. Should it make its debut back on the JSE? How does that stack up in your view?

KOKKIE KOOYMAN: I must say I was an investor in the original African Bank, sort of way in the early days. Many people forget it was actually listed in a vehicle called Baobab, and it listed on the stock exchange under then Leon Kirkinis, who at that stage I think, sure, did a marvellous job until they went and bought Ellerines. But that’s history.

But what I’m hearing and reading about the current African Bank is that – the same as that original African Bank – they are trying to be a bank for people who are serious about trying to make a difference in their lives, but have a spirit of resilience, the audacity to believe. The old African Bank really tried to be a good bank for its clients, and I see the current bank doing that as well.

Now, every bank will say that. But the growth they’ve shown shows that the clients do believe it. Maybe I should add that obviously they are very much still a retail bank. It’s only when you go into corporate banking that you have bigger costs.

But the bank is quite profitable if you measure it on its return on capital. It’s almost two times, two-and-a-half times more profitable on its asset base than comparable other banks in South Africa. But it’s still fairly small, just compared to Nedbank, which is the smallest of the so-called big four. If you look at capital, Nedbank is 10 times bigger in terms of its number of employees; it’s almost 10 times bigger.

But it has a good product range. African Bank has also got good digital capability, and it has a good growth prospect if it continues on that vein of giving good client service. I think it’s going to be interesting how it lists, because it should be a fairly liquid bank in terms of liquidity on the stock exchange if the Reserve Bank sells its 50% holding on the market. The South African banks each have shareholdings and I’m sure will also over time divest. So it’s only maybe the PIC which would remain a core anchor shareholder.

FIFI PETERS: I suppose it’s too soon now to be talking potential price and valuation for the bank. We would have to wait and see those details when they come.

KOKKIE KOOYMAN: Yes. At the moment banks in South Africa are trading at very low valuations based on the history, but that’s partly because of post-Covid, partly still because of our low growth. But globally, as the interest rates are starting to rise in South Africa as well, due to the inflation waves that we are seeing, banks become more profitable and it’s simply because a lot of deposits are lazy, they don’t reprice. But the lending rates do go up with interest rates. So the bank margins actually improve.

It’s interesting that the Reserve Bank also said they’ll do so when market conditions are good. I think if they do it over the next 12 months you’re going to see fairly good market conditions. We are seeing a pickup in loan growth, better margins, and bad debts are still fairly low. So, in terms of valuation, most probably it will be on a price to book of around 1.2, 1.3. [With] average banks, the return on capital they can trade at is often between 1.5 and two. That means that listing would create a good opportunity for investors and for the bank and for the Reserve Bank, which is exiting. I think what’s going to be more interesting is do they offer clients a potential share as well, or do they just open it to the public?

FIFI PETERS: Mm, that is interesting. It makes me tempted to go and open an African Bank account to participate.

KOKKIE KOOYMAN: Exercise that thing then you’ll see a strong inflow of deposits, which is a good thing.

FIFI PETERS: Kokkie, we’ll leave it there for now. Thanks so much for your time. Hopefully catch up when the detail starts flowing in on that route to IPO for African Bank. That was Kokkie Kooyman, portfolio manager at Denker Capital.