On 6 August 2022 African Bank Limited announced that it was selected as the successful bidder that will acquire the majority of the assets and liabilities of Ubank and absorb its employees on a going concern basis for R80m.
This article will cover seek to cover how Ubank come into play.
Brief history of Ubank;
In 1975, Teba Cash Financial Services was formed to provide mine workers with basic financial services such as facilitating the remittance of funds to families and dependants.
In June 2000, Teba Bank was granted a banking licence, although its ownership remained in the form of a trust managed/administered by trustees who are elected by the National Union of Mineworkers (NUM) and the Mineral Council South Africa (MCSA).
1 Oct 2010, the name of the bank was changed from Teba Bank to Ubank.
Ubank offers its customers transactional, credit, savings and insurance services. As at 30 April 2022, Ubank had 4.7 million accounts and the total value of all retail depositors’ claims stood at R4.8 billion. Retail depositors represent 98% of Ubank’s total liabilities.
What is African Bank buying? African Bank will not be acquiring the Ubank legal entity, and any residual assets and liabilities will remain with its legal entity.
The lending book of Ubank can be efficiently absorbed into African Bank’s larger lending book. Ubank customers will be migrated to African Bank’s MyWORLD product which offers a higher degree of personalisation, lower fees and greater competitive value.
An important body; The Prudential Authority regulates financial institutions (banks and insurers) and market infrastructures to promote and enhance their safety and soundness; and to protect financial customers against the risk that those financial institutions may fail to meet their obligations and support financial stability.
The Prudential Authority had intensified its supervision of Ubank due to corporate governance concerns, a high number of internal control weaknesses, and the prolonged period it has taken to secure the injection of sufficient capital to;
- comply with the minimum capital requirements,
- diversify the bank’s business model, and
- ensure the future sustainability of the bank.
16 May 2022, , the Minister of Finance, in consultation with the Prudential Authority, decided to place Ubank under curatorship with immediate effect.
Curatorship is triggered at a point where the Prudential Authority is of the opinion that a bank cannot continue to operate either through financial information available to the PA that indicates such or due to governance concerns to protect depositors, and to ensure an orderly resolution of the bank.
A bank is required to manage its affairs to maintain a prescribed minimum sum of share capital and unimpaired reserve funds.
The prescribed amount of such funds may not fall below the greater of R250 million and a prescribed minimum percentage of the sum of amounts relating to the different categories of assets and other risk exposures (i.e. credit risk, counterparty credit risk, market risk and operational risk).
Section 72 of the Banks Act provides that a bank is to hold liquid assets in South Africa to a value which is at least 20% of its prescribed liabilities.
The liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) should each not be less than 100%.
The LCR promotes short-term resilience of banks’ exposure to liquidity risk by ensuring that they have sufficient unencumbered high-quality liquid assets that can be easily and immediately converted into cash in private markets to meet their liquidity needs for a 30 calendar-day liquidity stress scenario.
Ubank remains highly liquid with a liquidity coverage ratio in excess of the regulatory requirement. Ubank’s liquidity coverage ratio of 150.57% exceeds the industry average of 146.35%.
Now, where lies the issue with Ubank?
It all lies in its capital adequacy ratio (CAR). Ubank has been in breach of its minimum capital adequacy requirements, as per Section 70 of the Bank’s Act 1990 (Act No 94 of 1990) for more than a year now.
The SARB regards the capital adequacy ratio as a key prudential supervisory tool.
The capital adequacy ratio (CAR) measures a bank’s capital requirement in relation to its risk-weighted assets. Capital acts as a buffer against unexpected losses. The SARB said that Ubank has been unable to meet its minimum capital adequacy ratio (CAR) of 22.5% for more than a year and has reflected a significant weakening trend over the period. The CAR reached a level of 3.3% at the end of April 2022.
Ubank was unable to timely raise the additional shareholder funding (capital) needed to restore its regulatory capital adequacy requirements. The Bank is 100% owned by Ubank Group Limited, which is in turn 100% owned by Teba Fund Trust (Teba).
Ubank’s capital adequacy ratio as at 31 May 2022 stood at 0.44% compared to the industry average of 17.97%
In 2021, Ubank announced that the recapitalization of the bank is at an advance stage which will translated to an capital injection of R330m lt was anticipated that the flow of capital will occur during the second half of 2021 resulting in an improved capital position.
Throwing money to resolve capital inadequacies and/or liquidity issues doesn’t resolve them in the long run. These issues will reoccur if you do not strengthen your governance and financial controls.
Ubank tried to raise R800m. Have a look at its FY21 balance sheet.
Fun Fact: African Bank Holdings Limited shareholdersare the South African Reserve Bank (50%), the Government Employees Pension Fund (25%) and a consortium of South African banks (25%), including FirstRand Bank Limited, Standard Bank, Absa, Nedbank Limited, Investec Bank Ltd and Capitec Bank.
Click this link to access African Bank’s acquisition of Grindrod Bank: