African Bank needs deposits as model fails
Johannesburg - 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, a competitor in unsecured lending that began taking retail deposits in 2002.
Abil, as the bank is known, spiralled toward collapse last week after saying it needed to raise at least 8.5 billion rand 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 August 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 August 10 Abil needs a “strategic rethink” of its business.