By Christiaan van Huyssteen (@cvh23)
Time for African Bank to start from scratch.
The actions taken in the following weeks will determine what the future holds for the bank.
1. Bring In New Management
The current management have failed dismally. This may be easy to say looking back, but there were clear errors of judgement. You get the feeling that management were very casual and laissez faire in their duties. This may work at Google, but not at a bread and butter business like a short term lender.
- They were responsible for the ill-fated Ellerines purchase in 2008, (at an arguably overvalued price) overlooking the fact that the world was entering a recession.
- They failed to respond strategically to the worsening economy by not adjusting credit policy and standards.
- They did not see the consumer debt bubble coming.
- They underestimated the value of non performing loans year after year, making insufficient provisions for bad debt, thereby impairing their ability to identify problems and adequately manage capital requirements.
It is important to note that borrowers should take some of the blame. They are not coerced into taking out loans.
2. Sell Ellerines At Any Price
The Ellerines purchase was an acquisition doomed to failure from the beginning. It was purchased in 2008 just as the economy peaked, for R10b. It is a wound that keeps on bleeding, posting a loss of R1,6B for the financial year. If African Bank is to get back on track, it must stop the bleeding and focus on fixing its core business.
3. Recapitalise With Equity, And Find An Underwriter
Draw up a budget with the requirements to make and implement the necessary reforms. Go hand in hat to shareholders, and ask for the R5B or so necessary to cover the losses and make the difficult changes. This may well mean issuing new shares at a serious discount. Issuing more bonds won’t be possible, as yields will be sky high. The likes of the PIC or Coronation might be willing to underwrite shares.
4. Scale Down Operations
Close branches that are not performing, this includes those making losses as well as those that aren’t producing results strongly and consistently. The company needs to focus on getting out of the red, even if a lower risk policy means lower potential growth. The business needs to be smaller in order to be better managed, and should be more conservatively run for the time being.
5. Develop A Stricter Credit Policy With Lower Interest Rates
Rather be too conservative in this department. Bad debts have been the main problem up until now, and this needs to be addressed. Make it more difficult for people to get loans. Lower interest rates may also lower risk, as many people simply can’t afford to pay at the higher rates, and simply give up on their loans. There may well be an interest rate sweet spot where people are attracted to take out loans, and not put off from paying them back at the high rates.
6. Develop Plans To Collect Outstanding Debt More Urgently And Aggressively
No, don’t break any kneecaps. Maybe there is just a lazy attitude to collecting debt, and debtors are taking too many liberties. Maybe some resources should be allocated and some plans developed to be more assertive and urgent in collecting debt. Perhaps branch managers should be incentivised to take the process more seriously, because this may be one of the causes of the high amount of bad debts in the books.
7. Be Transparent And Put All Cards On The Table
Study the statistics to make an accurate and prudent provision of the toxicity in the system.
8. New Image
Rebrand the business, give it new colours and a new logo. It needs refreshment. You just get a better impression when you walk into a Capitec branch than when you walk into an African Bank branch. The typical branch might not be in the most affluent areas, but that is no excuse for not making it look decent and clean. A top down refurbishment will be a breath of fresh air, and add a sense of professionalism that can uplift the culture and morale of what is a very negative business environment at the moment.
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