FIFI PETERS: African Bank could return to the JSE. In 2014, you will recall, the bank went bankrupt due to financial mismanagement. She had to be rescued by the South African Reserve Bank, which then led to the bank being deregistered from the JSE to help clean up the mess behind the scenes.

Things started looking up for African Bank well before the pandemic, or even before Sarb announced yesterday that it had been unable to find a suitable buyer for its 50% stake in the bank, which she had always intended to leave. He said that due to the inability to find a suitable buyer for his stake, the best way out may be through a possible IPO.

But to discuss African Bank’s investment case in a bit more depth, we have Kokkie Kooyman, the portfolio manager at Denker Capital. Kokkie, thank you very much for your time. First of all, do you understand what the Reserve Bank of South Africa meant when it said it could not find a suitable buyer? In your opinion, how do you think they measured “fit”?

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

But look, you have to [not] lose sight of the fact that the unemployment rate in South Africa is very high. Loan growth and growth in South Africa is very low, so we are not a very attractive destination for long-term offshore capital. I think it will actually be a good result for South Africa, if it is listed on the stock exchange, the JSE – another listing.

In fact, it also gives more news stories to South African audiences. It becomes more visible. So I think I’m really glad they didn’t find offshore [investor].

FIFI PETERS: That word “suitability” really got me thinking because I don’t think “suitability” was necessarily about who had the money or not. I imagine anyone bidding could afford it. Corn [as to] what were the other factors that made them unsuitable, I guess we’ll have to ask the Governor of the Reserve Bank. I hope my industry colleagues will do so tomorrow at the press conference after the MPC decision.

But the focus of tonight’s discussion is the investment case for African Bank. Should it debut on the JSE? How does this compare in your opinion?

KOKKIE KOOYMAN: I have to say that I was an investor in the original African bank, sort of at the beginning. A lot of people forget that it was actually listed in a vehicle called Baobab, and it was publicly traded under Leon Kirkinis, who at that time I think did a wonderful job until they bought Ellerins. But that’s history.

But what I hear and read about the current African Bank is that – the same as the 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 who have a spirit of resilience, the audacity to believe. The old African Bank really tried to be a good bank for its customers, and I see the current bank doing the same.

Now, every bank will say that. But the growth they have shown shows that customers believe in them. Perhaps I should add that it is obviously still a retail bank. It’s only when you get into business banking that you have higher costs.

But the bank is quite profitable if you measure it by its return on capital. It is almost twice, two and a half times more profitable on its asset base than other comparable banks in South Africa. But it’s still quite 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 number of employees; it’s almost 10 times bigger.

But it has a good range of products. The African Bank also has a good digital capacity, and it has good prospects for growth if it continues in this vein of providing good customer service. I think it’s going to be interesting to see how it’s going to list, because it should be a fairly liquid bank in terms of stock market liquidity if the Reserve Bank sells its 50% stake in the market. The South African banks each have stakes and I’m sure over time they will divest as well. There is therefore perhaps only the PIC which would remain a reference shareholder.

FIFI PETERS: I guess it’s too early now to talk about potential pricing and valuation for the bank. We’ll have to wait and see those details when they arrive.

KOKKIE KOOYMAN: Yes. At the moment, banks in South Africa are trading at very low valuations based on history, but that’s partly because of post-Covid, partly again because of our weak growth. But globally, as interest rates start to rise in South Africa as well, due to the waves of inflation we’re seeing, banks are becoming more profitable and that’s just because a lot of deposits are lazy that they do not reevaluate. But loan rates increase with interest rates. Bank margins are therefore improving.

Interestingly, the Reserve Bank has also said it will when market conditions are good. I think if they do that in the next 12 months, market conditions will be pretty good. We are seeing a recovery in loan growth, better margins and bad debts are still quite low. So in terms of valuation, it will most likely be on an accounting price of around 1.2, 1.3. [With] average banks, the return on capital at which they can trade is often between 1.5 and two. This means that the listing would create a good opportunity for investors, for the bank and for the Reserve Bank, which is withdrawing. I think what’s going to be more interesting, do they also offer a potential share to customers, or do they just open it up to the public?

FIFI PETERS: Mmm, that’s interesting. It makes me want to open a bank account in Africa to participate.

KOKKIE KOOYMAN: Exercise this thing, then you will see a strong influx of deposits, which is a good thing.

FIFI PETERS: Kokkie, we’ll leave it at that for now. Thank you very much for your time. Hopefully we will catch up when the details start rolling in on this road to IPO for African Bank. It was Kokkie Kooyman, portfolio manager at Denker Capital.