 Alexx Zarr takes a close look at the African Bank advertising campaign, takes out his calculator, compares the pricing with Capitec and comes to a conclusion that won’t please shareholders who’ve just kicked in billions more to put Abil back on track. Abil’s CEO Leon Kirkinis stumped up R44m of his own fortune to follow the recent capital raising issue. With that kind of money you would expect the further injection is based more on logic than Kirkinis’s Mediterranean temperament. But reading Zarr’s analysis, it’s hard to see how. – AH   Â
There is a new page on the African Bank website. It reads, Welcome to African Bank Savings and Investments. Grow your legacy today…Earn up to 9.50% interest. African Bank is the market leader in the personal unsecured credit market in South Africa.
Here comes African Bank, your friendly, Savings and Investment Bank. Is this good news, no news or another adventure?
There has been little good news coming out of African Bank for a while now. Its share price has been bludgeoned. It has had to pay a R20 million fine to settle an investigation into reckless lending. This was a Houdini escape from the R300 million the regulator initially demanded. Then there is the little matter of Ellerines. A R9,100,000,000.00 fiasco. That is real money, even in government speak. I know it is made to sound like the bits that jingle in our wallets, but don’t be kidded.
So, is African Bank (Abil) showing signs of a shift in its funding model, or just dabbling in the retail deposit taking business? Perhaps it is feeling a chilly breeze blowing across the country from Paarl and thinking about how smart its competitor has been to enter transactional banking and deposit taking. If this is the case, it has taken a long time to get moving. It is not often that folks in the Windy Cape get one over the Gautengers, but this seems to be one of them.
I have to assume that the prime driver for this decision is cheaper funding for its credit business. It is a general rule of thumb that retail deposits (liabilities) are relatively cheap, and they are quite stable. Thus, if a bank can build up a sizeable deposit book it is a productive pool to finance credit, especially short-term unsecured loans.
Two of the practical challenges to moving down the full-service banking road are backend and frontend processing systems to administer new products, and in conjunction with this, the re-orientation of staff in outlets (branches). Probably the most demanding systems development and costs are for transactional services. It is unlikely that Abil’s cost-sensitive executives (as long as it is not R9.1 billion for a furniture business) will stumble down this path. This is despite the potential of massive pools of funds that sit in transactional accounts, on which banks pay very small or no interest.
I would imagine that staff in outlets are so accustomed to selling loans, although they kinda sell themselves, that it may be quite a challenge to get them to buy deposits. The ways in which they are paid and incentivised would probably need to be changed. The ways in which staff trade off effort between loans and deposits can act as a severe impediment to business intentions.
Although Abil punts savings and investments, there are currently only savings products, fixed and access deposits running from three months to five years (60 months), and 32-day notice deposits. If you have R5,000 to invest (the minimum amount), what is the best that Abil offers? (Note. Two minimum deposit amounts are indicated on the website, R5,000 and R500.)
At Abil a 60-month fixed deposit will provide a return of 9.50%, with interest capitalised semi-annually. An equivalent product at Capitec will provide a return of 7.80% on a minimum deposit of R10,000. At one of the full-service banks, a minimum deposit of R1,000 will return 4.85% over 60 months.
And then there is the Specialist Bank and Asset Manager on the corner of Grayston Drive and Rivonia Road that will give you an effective rate of 6% for R1,000,001.00, over 12 months.
It appears that Abil is paying a premium for its retail funding, even compared to direct competitors. Either it is doing this to try and collar the fixed deposit market, or it feels it can afford to do so due to the current price it pays for funding, and the margin between its loans business and retail liabilities.
The third possibility is that Abil is simply getting its pricing wrong. In the meantime, it is offering a Christmas rate.
* Alexx lives in and works from Centurion.  He has degrees in economics, politics and strategic studies.  In the recent past he has been managing director of a mutual fund company, a pseudo banker managing wealth and transactional products and currently runs a specialist research and consulting entity.  Before that he did a stint at National Treasury and at a Constitutional entity, managing its research division. He has travelled extensively, studied offshore and done a stint of work for the IMF.  More than most things he loves to mountain bike, let his dogs walk him and write – just write.
