South Africa: African Bank basks in profit jump and IPO dream, warns of power woes

By Ray Mwareya
Posted on Thursday, 8 December 2022 16:58

South Africa's African Bank

South Africa’s African Bank, which was on the verge of bankruptcy, is revelling in a 38% jump in annual profit on the back of 87% growth in retail loaning after doling out R14bn ($800m) in a year.

“We are making great strides towards achieving our targets, which talks to our mission of a compelling listing proposition,” Kennedy Ngubane, African Bank CEO, tells The Africa Report citing plans to list on the JSE by 2025.

“The intention is to enable our current shareholders to exit by means of this IPO,” he says. African Bank is looking […] to gain 3.5 million new retail customers by 2025.

Back from the dead

African Bank, which is owned by the Reserve Bank of South Africa, the Government Employees Pension Fund and the Big 5 banks in South Africa, was in dire straits in 2015. It couldn’t pay creditors, and the Reserve Bank bought its shares in 2016 to halt a collapse.

African Bank’s new lease of life is entrenched in its new strategy that Ngubane terms ‘Accelerate25’. This means the bank is recruiting a skilled talent-set at both at the executive and board level, and channelling its energy towards the 2025 listing goal.

The global boom in bank lending in 2025 saw African Bank significantly grow its loan book after relaxing lending criteria early last year. However, a tightening of loans is now in place. As the global economy has become increasingly weak, Ngubane says African Bank has detected a need for caution.

As the economy worsened and inflation took hold, we observed a rise in our early risk metrics

“As the economy worsened and inflation took hold, we observed a rise in our early risk metrics, which […] necessitated the tightening of credit once again in August 2022, and again in October 2022,” says Ngubane.

South Africa’s Reserve Bank Lesetja Kganyago has aggressively pivoted interest rates from 4% in January 2022 to 7% November 2022.

Crowded field

The low-income-focused banking sector in South Africa is getting crowded with upstarts like Discovery Bank, TymeBank, and Capitec rolling out operations and angling for the same customer base. Going forward, experts – like Rabelani Dagada, who teaches digital commerce governance at University of Johannesburg – worry that unless digital innovations keep up, there is profit-risk for players who rely on aggressive growth by tapping the low-income segment of the market.

However, “the entry of new players in the digital banking sector should be seen as positive”, says Ngubane, who argues that South Africa’s banking customers look for accessibility, and for those who use public transport, it is becoming increasingly expensive to physically visit local bank branches.

Therefore, digital banking, of which African Bank is betting on, gives the low-income segment of the South African market even greater access to financial services than before.

“We have observed very pleasing growth in our interactions with customers online,” he says.

Inflation, interest rates hit

As interest rates get adjusted up – the situation for South Africa’s banking customers looks challenging in 2023. Mortgage payers are particularly under strain with banks grabbing back 1200 homes per month from defaulting consumers. However, high interest rates are not the biggest challenge for South Africa’s banking customers, reveals Ngubane.

The majority of South Africans customers are not affected directly by interest rates

“The majority of South Africans customers are not affected directly by interest rates, however high inflation does affect them directly,” says Ngubane, revealing that affordability for customers is being closely monitored and the bank has tightened lending criteria accordingly.

Eskom strains South Africa’s banks

Apart from expected inflation in 2023, Eskom, South Africa’s power utility, and its blackout woes have emerged as the biggest impediment for the bank’s ability to run data centres and automated banking machines round-the-clock.

African Bank has made plans to ensure rolling connectivity as Eskom’s electricity woes brings ‘Stage 6’, which is a moniker for 12-hour-long blackouts in South Africa. A key strategy of African Bank has been to ensure minimum disruption at its core Midrand campus in Johannesburg, branch networks, and to clients and staff working from home. For now, ordering diesel, and storing it at offsite vendor facilities has been key to keep generators humming for the bank to work.

Still, Eskom’s woes are taking a toll on banks across South Africa in general.

“Extended ‘Stage 6’ [and beyond] outages will strain the equipment and our ability to maintain continuity over an extended period,” says Ngubane, who reveals how banks in South Africa are being stretched by Eskom’s woes – running pricey diesel operations.

They ask employees to come to the office when there is no power at home, temporarily close the contact centre building so as to preserve diesel, switch off heating and fans, purchase batteries and generators for networks of branches and shift diesel from tanks to mobile bunkers to transfer it between buildings.

“Diesel supply will continue to be a core risk both in terms of cost and availability,” he tells The Africa Report, citing the bank’s concerns over Eskom’s power woes.

Understand Africa's tomorrow... today

We believe that Africa is poorly represented, and badly under-estimated. Beyond the vast opportunity manifest in African markets, we highlight people who make a difference; leaders turning the tide, youth driving change, and an indefatigable business community. That is what we believe will change the continent, and that is what we report on. With hard-hitting investigations, innovative analysis and deep dives into countries and sectors, The Africa Report delivers the insight you need.

View subscription options