After the Bell — does South Africa need another two banks?

Does South Africa need another bank? the Finance Ghost, an esteemed Daily Maverick contributor, asked poignantly this morning in his newsletter. The question arises because insurance stalwart Old Mutual has been given the go-ahead to launch banking services. The rough plan is to build a mass-market bank for which Old Mutual has pencilled in a cost of about R2.5-billion.

Clearly, the government believes there should be more banks. Over dinner last night, held in Durban by the Islamic Minara Chamber of Commerce at the premises of Al Baraka Bank, President Cyril Ramaphosa said the dominance of the big five banks – FNB, Absa, Investec, Standard Bank and Nedbank – had excluded black South Africans from pivotal roles in the financial sector, the Independent Online reported. (IOL is controlled by businessman Iqbal Survé who is currently fighting to retain accounts used by the many companies under his control with these very banks.)

Ramaphosa apparently praised the PostBank Amendment Bill, which converts the PostBank into a state bank and separates it from the SA Post Office, which unfortunately is effectively bankrupt. The ideologues… sorry, I beg your pardon, the Very Admired State Officials and Politicians with an Estimable History of Running Banks (VASOPEHRBs), who are behind this move, have applied for the Post Office Bank to be registered as a bank with the Reserve Bank. All the legislation does is remove the Post Office Bank from the jurisdiction of the Post Office, putting it under the direct control of the minister of communications, since the minister of communications is the right person to run a bank. By the way, I am not making this up.

Both Treasury and the Reserve Bank are sceptical about this, which of course has not stopped the ideologues – sorry, VASOPEHRBs – who have decided to soldier on. The problem that Treasury and the Reserve Bank have is something they refer to as the “financing” of the bank because although the PostBank operated as a bank, it has operated under a very unique licence, under terms where depositors’ cash is guaranteed by the state. But in return for this facility, the PostBank is not allowed to make loans; it’s just a deposit-taking institution, designed to be used as a safe storage vehicle, particularly for poor South Africans. But the ideologues – sorry, VASOPEHRBs – want the bank to have lending power, which is why it’s going to all this trouble. And that is why we should all be very afraid.

In the meantime, the banking sector in South Africa – already enormously competitive – is becoming more so, raising questions about not only the competitive position of the PostBank but also of the Old Mutual bank. Central to this problem is the question I don’t think the ideologues – sorry VASOPEHRBs – have asked themselves: Who owns the branches? If the branches are owned by the Post Office, which they are, and the Post Office, now bankrupt, decides to close the “branch”, then how will Post Office Bank, now a separate institution, service its clients?

Oddly, the same question is pertinent to Old Mutual, which does have some branches but not that many, and arguably too few to be a convenient banking group. In both cases, the answer is loosely similar even though the circumstances and customer bases are very different; the banks will be largely virtual. Well, yes, but…

Banks are indeed becoming much more virtual and all of South Africa’s banks have been cutting back on branch numbers. It’s also true that technology is now absolutely critical in the running of a bank. But you know what’s more important? Well, many things. But for one, customers.

Old Mutual does have an advantage here because it estimates that it has perhaps three million insurance clients who might want to bank with the company. It also has something else going for it, as my podcast colleague Mark Barnes pointed out in our latest podcast (coming out tomorrow): Banking is now, as ever, very influenced by margins effectively determined by a mixture of state regulation, Reserve Bank lending rates, and inflation. The reliability and depth of data have made the assessment of lending risk more accurate… and uniform. In South Africa’s case, these lending rates vary but right now they are actually pretty generous to South African banks, as they are in a lot of other countries too. I suspect this is at least partly because we are still living under the shadow of the 2008 banking crisis and governments really, really don’t want to be called on to bail out banks – again.

Profitability rates of South African banks are good, or to put it another way, bad – depending, of course, on whether you are an investor or a customer, or, on the other hand, a borrower or a saver. The tipping of the scales in favour of investors/banks is obviously not going unnoticed by the financially literate, since we have seen the recent emergence of TymeBank, Bank Zero and Discovery Bank. They all have slightly different niches, but they are all doing amazingly well – much better than I thought they would on launch. And there are niches within the niches too, with a string of FinTechs operating on the edges, not to mention the cellphone companies, which are also now heavily into the lending market.

For Old Mutual, it’s hard not to notice that a host of insurance companies have been here before and lots of these have been unwound, including Absa and Sanlam, FirstRand and Momentum, and also, as it happens, Nedbank and Old Mutual. The advantage Old Mutual has is a huge investment book; it has assets under management of about R1-trillion. But AUM doesn’t always translate into a profitable banking unit, so even in these facilitative times for banks, investors are going to be sceptical.

Oddly enough, the Post Office Bank also has a huge customer base because it helps pay South Africa’s Social Security Agency (Sassa) grants that add up to about R220-billion a year. Some of the payouts used to occur physically at Post Offices in cash, but that was stopped recently. Now Sassa grants are paid directly into cards, which can be used in supermarkets and ATMs. The latest report of the business rescue practitioners seems to suggest that the Post Office wasn’t making very much of a margin on paying Sassa grants; but as usual with government institutions, this is all very hazy.

I can’t get over the sense that South Africa is overbanked. It’s the same sort of sense you got circa five years ago when instinctively you knew there were too many malls in South Africa. I may be wrong – I hope I am – but little red lights are flashing here. DM