African Bank’s acquistion of Grindrod Bank for R1.5bn and the majority of Ubank’s deposits, loans, and employees for R80m. Part 1 of 2 by Maano Andy Thovhakale

African Bank has done well to rise from the ashes.

27 May 2022, Grindrod Limited announced that it had reached an agreement with African Bank Limited whereby Grindrod Limited will dispose of 100% of the issued ordinary share capital of Grindrod Financial Holdings as well as the 100% of the preference shares issued by Grindrod Bank for a total cash consideration of R1.5 billion.

This article (part 1) will cover;

  • Grindrod Limited and its strategic focus
  • Overview of Grindrod Bank
  • Grindrod Bank’s financial performance in FY21
  • African Bank’s 2014 collapse

Grindrod is a logistics and financial services company with significant investments in the marine fuel trading, private equity and property sector. Its key operations consist of port and terminals which provide dry-bulk commodities handling services along key trade corridors in South Africa, Mozambique and Namibia. It has two segments being; Logistics and financial services.

The Logistics segment operates a container cargo feeder services integrated with landside operations for container handling, ships agency, clearing and forwarding, and rail services. 

Grindrod Bank provides bespoke bank and related services to its private, corporate and institutional clients particularly in property lending, SMME banking, capital markets and retail banking.

Grindrod Limited is in the process of implementing its short-to medium-term strategy of disposing non-core operations (Marine Fuels and Private Equity and Property portfolio investments). The long and short of this is the separation of the Freight Services and Banking Services businesses. Grindrod Limited is on a disposal spree to realise this vision. Some of these disposals include;

  • sale of shares held in Senwes for R376.0 million
  • sale of 100% of Fuelogic Namibia for R19.85m
  • sale of Fuelogic SA, a division of Grindrod for R107.2m
  • sale of Grindrod Shipping shares for R338.1 million. 
  • sale of the offshore real estate investment R311.7
  • sale of its entire shareholding in SIRE for a total consideration of R245 million 
  • sale of Senwes ordinary shares for a cash consideration of R385 170 693.90

Proceeds from disposals of non-core investments have been utilised to settle interest-bearing debt.

Now why did African Bank buy Grindrod Bank? Grindrod Bank will provide an entry into the business banking market which will be grown off African Bank’s larger balance sheet and additional allocation of capital.

What kind of services does Grindrod Bank provide and how did the bank perform in FY21?

Grindrod Bank is a niche financier, known for its commercial and industrial property finance expertise and is differentiated by its mezzanine finance product offering such as vanilla finance facilities, mezzanine finance and blended facilities.

The property lending division forms part of the Grindrod Bank’s foundation, accounting for a substantial portion of the Bank’s advances book. Property lending base increased by 9.24% to R3.82 billion while the property loan impairments decreased by 68.61% in FY21.

Small and medium-sized Enterprises (SME) division focuses primarily on the investment and SME banking needs of companies generating revenue between R50 million and R500 million a year. It offers corporate banking services as and when these are required such as; 

  • empowerment and management buyout transactions for unlisted companies,
  • growth capital to fund the expansion of SMEs with a track record of strong cash generation, and 
  • loan sizes typically ranging between R30 million and R120 million.

SME lending portfolio comprises clients operating primarily in the manufacturing, industrial, financial and automotive sectors and get access to; 

  • short-term facilities to improve their cash flow management and working capital cycles, 
  • asset-backed growth finance to fund equipment, vehicles and inventory, and 
  • flexible, personalised service based on SME-specific needs.

Grindrod Bank provided R315 million in financing to support small entrepreneurial businesses in the transport, telecommunications and communications sectors. The SME lending base increased by 3.19% to R4.84 billion. New SME lending also increased by 13.6% to R324.20 million.

The platform banking operation enables access to an extensive range of digital product platforms and payments services supported by sustainable commercial arrangements with nonbanking businesses that offer growth potential. 

Retail client base increased by 4.9% to >1 million. Oct 2021, Grindrod Bank concluded an agreement with Shoprite Checkers as a key new platform partner. The launch secured more than 100 000 clients in the first month and a total of 196 000 clients by 31 Dec 2021.

Grindrod bank in partnership with Net1 launched a new EPE Lite account and participated in the South African Security Agency’s request for proposal (RFP) for the distribution of the R350 COVID-19 related social relief grant

Grindrod Bank has a plan to offer a transactional banking account to businesses generating annual revenue up to R1 billion in 2022. The initial roll-out will target the bank’s existing corporate, SME and investment banking clients and will then be extended to our depositor and property lending client bases.

A quick look at some of Grindrod Bank’s numbers.

  • Earnings improved in FY21 by 157% from FY20, despite Grindrod Bank remaining cautious in its lending activities and retaining surplus liquidity in excess of R5 billion as at 31 December 2021. Grindrod Bank’s lending and core deposit books increased by 5% and 20% to R8.3 billion and R10.3 billion respectively, from December 2020. 
  • Grindrod Bank significantly improved its overall performance with a capital adequacy ratio of 15.7% for FY21, comfortably above the prescribed regulatory minimum of 10.50%. 
  • Liquidity ratios: a liquidity coverage ratio of 350% and a net stable funding ratio of 146%, well above regulatory minimum requirements.
  • Return on Equity (ROE) of 8.05%
  • Cost to Income ratio of 64.79%
  • New lending R324.20 million
  • Total gross loans and advance were R8.78 billion. Grindrod Bank has a goal to have SMEs comprising 50% of the Bank’s advances. 
  • 19.64% growth in funding base to R11.92 billion was attributable to: 
  • A R1.77 billion increase in deposits due to growth in call, notice and fixed deposits – a healthy split to mitigate concentration risk in the portfolio. 
  • Refinancing of R263 million of DMTN funding and an additional R137 million issuance. The notes were oversubscribed 1.25 times and issued at a rate of three-month JIBAR plus 250 bps, resulting in a 50-bps saving to the Bank. Funding from the DMTN programme currently amounts to R650 million.
  • Credit loss ratio 0.61%. After the COVID-19 related spike in non-performing loans in FY21, Grindrod Bank experienced a 48.87% reduction in the credit impairment charge to R51.91 million. This translated into a credit loss ratio of 61 bps vs 128 bps in 2020 and was attributable to improved credit management over the loan portfolio, better-than-expected collection outcomes and a reduction in stage 3 loan impairments as some clients cured. Certain of Grindrod Bank’s lending clients were impacted by the civil unrest that occurred in KwaZulu-Natal in July 2021, which caused damage to the properties that serve as security and underpin the facilities provided by the bank.
  • Grindrod Bank’s operating expenses increased by 24.41% to R327.63 million. The significant increase in costs was attributable to a 39.01% increase in staff costs to R211.39 million. The increase in operating costs translated into a higher cost to income ratio of 64.79% and a negative JAWS ratio of 9.81%.

Here’s the traditional big 4 bank’s credit loss ratios;

  • ABSA: 77%
  • FirstRand: 61%
  • Nedbank: 83%
  • Standard Bank: 73%

African Bank Holdings Limited shareholders are 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. 

How this ownership came about is very interesting and relates to the 2014 collapse. Let’s do a quick overview of this for interest’s sake.

In 2007/2008, African Bank acquired Ellerine for R9.8 billion. Yes, African Bank bought Ellerine the furniture store. What was African Bank doing buying a furniture store you may ask? African Bank wanted Ellerine’s credit book. Ellerine’s main source of income was not the sale of furniture but selling it on credit and charging “loan shark like” interest rates on those credit sales. African Bank was a monoline lender. Monoline lender offers and earns monies from only unsecured loan finance. It did not provide, and earn, fees from any transactional services.

African Bank did not have large volumes of retail deposits. In 2014, out of a loan book of R60bn and short-term debt of R4bn, it only had R111m of retail deposits (~0,2% of the total loan book and ~2,7% of short-term debt.) Unsecured loans increased at a rate of 30% a year between 2010-2012 and thus, the credit risk was huge.

The National Credit Regulator estimated that the market shares of the African Bank Investments and Ellerines in the micro-lending market will be 34% based on the loan book value, and 17% based on branches. 

African Bank Investments (parent company to African Bank) extend loans to the value of R1,4bn to Ellerines. This was purely reckless as loans were unsecured and had little chance of being repaid as Ellerines was unprofitable. The bank was not even lending money to retail businesses.

Ellerine Furnishers commenced with Business Rescue in 2014 which was the largest business rescue at the time based on the Public Interest Score of the company. African Bank provided liquidity to Ellerine of R70m per month to enable it to meet its obligations to its creditors. In 2010 the provision of credit and financial services component of Ellerine Holdings was sold to African Bank. This resulted in a significant decrease in the Ellerine’s income and profitability.

10 August 2014. African Bank Limited a wholly owned subsidiary of African Bank Investments Limited was placed into curatorship by the South African Reserve Bank and Minister of Finance. The board and execs are relieved of their duties during the curatorship. A curator is appointed by the SARB in consultation with the National Treasury & Minister of Finance. The curator takes over the full management functions of the bank with the purpose of rehabilitating it.

The curators’ proposed resolution plan focused on creating an optimal outcome for creditors, staff of African Bank, and the South African banking and the financial services sector as a whole. The process involved splitting of the “Good Bank” and “Bad Bank.” The bad bank, which comprised a substantial portion of the non-performing and underperforming assets that were housed in a separate legal entity and was renamed Residual Debt Services which was placed and continued to operate under curatorship.

SARB provided a senior secured loan of R3.3 billion in order to facilitate the disposal of the good business to “Good Bank” and a guarantee of R3 billion to the Good Bank to cover any claims that may arise as a result of the assets and liabilities transferred to the Good Bank.

The Good Bank (African Bank Limited) needed to be recapitalised. A R10 billion equity recapitalisation was provided by new shareholders. The recapitalisation led to a unique ownership of African Bank Limited.

The R10 billion equity recapitalisation was funded by the following.

  • South African Reserve Bank – R5 billion,
  • Public Investment Corporation – R2.5 billion and
  • Banking Consortium (FirstRand, Standard, ABSA, Nedbank, Capitec, Investec) – R2.5 billion.

The biggest outcome of the curatorship was a newly registered bank holding company, African Bank Holdings Limited and a new bank entity African Bank Limited issued with a banking licence, were formed to hold the Good Book, and continue as a bank.

Asset managers, some of whom were major shareholders stated that losses incurred on African Bank Investments shares were worth billions of Rand. Examples include:

  • Public Investment Corporation (PIC): R4 billion
  • Coronation: R3,52 billion
  • Allan Gray: R893 million
  • Stanlib: R706,5 million

The dividends that clients of the asset managers received were:

  • PIC – R1 billion
  • Coronation – R5,7 million
  • Allan Gray – R1,2 million and 229 000 shares in lieu of dividends.
  • Stanlib – R468 million

The dividends were far less than the losses suffered by shareholders.

Now, the South African Reserve Bank is finally going ahead with the disposal of its 50% stake in African Bank Holdings Limited. Why are they selling? The equity shareholding (50%) creates a potential conflict of interest due to the three functions fulfilled by the SARB in relation to African Bank Holdings (ABHL) and African Bank (ABL), namely:

  • a significant shareholder of ABHL
  • a regulator of ABL and
  • a lender of last resort.

In 2021, the SARB appointed Bank of America Merrill Lynch, Rothschild & Co, and Moshe Capital as transaction advisers to evaluate distinct options for the disposal of the 50% stake. What were the initial selling options?

  1. sale to a strategic investor or investors. SARB had called on interested parties to submit Expressions of Interest or
  2. an IPO (although this was highly dependent on prevailing market conditions at the time).
  3. Considering all the services Grindrod Bank offers and the niche it has, African Bank might have struck a very good deal for themselves here. Grindrod Bank declared an ordinary dividend of R30 million in September 2021 while the total preference dividend for the 2021 year amounted to R17.63 million.

Considering all the services Grindrod Bank offers and the niche it has, African Bank might have struck a very good deal for themselves here. Grindrod Bank declared an ordinary dividend of R30 million was declared in September 2021 while the total preference dividend for the 2021 year amounted to R17.63 million.

The acquisition of Grindrod Bank by African Bank needs approval from the Prudential Authority, the National Credit Regulator, the Competition Authorities and the Minister of Finance.

Following conclusion of the disposal, Grindrod will focus on its growth strategy within the Freight Services business and pocket a clean R1.5bn to boost its balance sheet. This looks like a win-win deal for everyone involved.

It seems African Bank has turned the corner from that fateful fall and in the 6 months to end-March 2022, it made a profit after tax of R257m, from a loss of R135m a year ago. Basani Maluleke and her team put in so much work and they can smile knowing that they captained the African Bank towards still waters.


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