In a tough economy, small banks will inevitably be under pressure. Sasfin Holdings provides an example of how small banks are responding to the economic crisis by moving in new markets and improving their technology. How’s it going? It’s not easy and the risks are high, but the bank is certainly pressing forward.

Sasfin, which released its interim results this week, recently changed gear strategically to penetrate new markets. It is investing heavily into technology to not only better cater for the unbanked and underserved, but take better care of its existing client base as well.

The group has taken meaningful strides in terms of its three-pronged strategy in respect of innovation. It upgraded its digital wealth and business banking platforms, SWIP (Sasfin Wealth Investment Platform) and B\\YOND in 2018 and concluded strategic deals with digital finance fintech Payabill and Hello Paisa’s new digital banking offering in March 2019. It has also strengthened its management team and enhanced its credit function.

But investing in the future does not come cheap. These and other investments in technology — including the acquisition of Absa Technology Finance Solutions (ATFS) in 2018 — saw costs grow by 12.31% for the six months to December. The Group’s cost-to-income ratio deteriorated to 73.96% (December 2017: 70.40%).

And even though cost growth is expected to reduce by year-end, Denker Capital’s Kokkie Kooyman, whose financial fund owns a large stake in Sasfin, says that elevated costs remain a risk for the business in a stagnating economy and in an environment where lending growth is flat.

For the period under review, Sasfin reported total asset growth of 3.14% to R13.572-billion (December 2017: R13.159-billion) with gross loans and advances growing by 8.72%, largely off the back of the ATFS acquisition.

Kooyman, however, adds that he admires the company’s attempt at diversification to better serve its current client base and to solicit new business.

“We would love to see more companies with such a longer-term mindset,” he says. Denker Capital expects the strategy to pay off in the next three to five years. The asset manager’s calculations indicate a return on capital employed of between 14%-15% over the next three years, and that excludes the potential income generated by the new initiatives.

“Fintech takes time to filter through to the bottom line,” says Kooyman, “as the process of building up a substantial new client basis does not happen overnight. What counts in Sasfin’s favour is its focus on small business, an area the big banks have been moving away from, so competition is relatively thin. Newcomers like Thyme, Discovery and Bank Zero will be focusing on a totally different demographic.”

Sasfin successfully launched digital platform B\\YOND, for SMEs, in 2018 and acquired a strategic stake in fast-growing fintech lender Payabill earlier in 2019. Payabill, a 100% digital lending business, provides working capital and/or trade finance to small businesses. The collaboration between Sasfin and Payabill accelerates financing opportunities for customers.

“Sasfin has been investing in fintech, building digital capabilities, such as B\\YOND — a digital business banking platform, which was built to enable businesses to attend to their finances and admin seamlessly. It has also been working with third parties (such as XERO Accounting) for a number of years with the aim of adding value to our business and clients. Payabill has made huge strides in giving businesses access to digital,” says Sasfin CEO Michael Sassoon.

Payabill was launched in SA in 2017 and settles suppliers directly for its clients and allows clients to select their own extended payment terms.

Payabill’s official aim is to “enhance access to finance for small businesses in South Africa. We all know that boosting small business creates jobs and enables growth. Traditional lenders have neglected this segment of the market due to the high costs associated with on-boarding and assessing these customers, as well as managing their credit risk.

“It made no sense to us that a retail consumer could get multiple forms of credit almost instantly via electronic channels, but small businesses could not. They were being neglected. With this in mind, we set out to build a completely paperless, digital solution to address this market’s unique requirements,” says Sassoon.

Currently, Payabill offers loans of up to R150,000 to businesses. The intention is that with the investment made by Sasfin, Payabill will be able to offer larger loans to SMEs in the future.

The alignment of Payabill’s aims and Sasfin’s long-term focus on small business in SA made for an ideal partnership.

“SMEs can now borrow digitally, via Payabill, and bank via B\\Yond from Sasfin — reducing admin and costs which often stifle small business growth. Both B\\Yond and Payabill are gaining meaningful traction in the SME market and there are a host of additional digital initiatives that we are working on to further help small businesses thrive,” says Sassoon.

“While Sasfin has always offered a trade and debtor finance solution, this was largely for more established businesses. The new offering speaks to smaller businesses that are passionate about growth, and our larger Trade and Debtor Finance offering will be there to support businesses that reach the next phase in their development,” Sassoon adds.

Sasfin’s B\\YOND platform has seen strong uptake with new clients since its launch in March 2018. Offering accounting light capability as well as the ability to do payroll, invoicing and banking on one platform, it operates as a business management tool that works effortlessly while you bank.

Smart dashboards, at-a-glance views of cash runways and the ability to tag and classify payments puts the platform streets ahead of any other banking platform in the country. Sasfin was also the first — and presently only — bank in the country that can integrate via direct feed integration — with Xero Accounting software. Businesses can manage their applications — from beginning to end — entirely online and as cards are delivered to clients, there is no need for any time to be spent in a branch at all.

Sasfin’s passion for entrepreneurs stems from the bank’s roots as an SME itself, having started its operation as a textile trading business operating out of Norwood in 1951. This business was converted into a finance business in the 1960s and listed as a trade and equipment financier on the JSE in 1987. Following a number of small acquisitions and strong organic growth, Sasfin obtained a banking licence in 1999.

On the Hello Group partnership Sassoon says:

“Hello Group, we have found the company that is best placed to serve the needs of the unbanked.” Founded about 13 years ago, the Hello Group has built itself up into a major player in the telecoms and financial services market by serving mainly migrant workers looking for an affordable way to communicate and do cross-border money transfers. It has expanded across emerging markets in Africa and Asia and now employs more than 1,000 people — up from 300 three years ago. It was the first company in South Africa to receive an independent money transfer operator licence from the Reserve Bank. It now has big plans to expand its financial services offerings in South Africa.

“Supported by Sasfin’s banking platforms and infrastructure, Hello Paisa’s digital banking offering comprises an adaptable ecosystem of services, including an intuitive mobile app, mobile sim card, bank account and a Visa debit card that operates at any ATM or point-of-sale device.

Only time will tell how these fintech investments will pay off for Sasfin, but Sassoon says the internal rate of return on realisation on investment looks positive. In the interim, Sasfin is starting to reap the fruits of the other significant strategic steps it has taken over the past two years.

The group posted a 59.89% growth in headline earnings to R80.531-million (December 2017: R50.367-million) primarily due to an improved credit loss ratio to 123bps (December 2017: 200bps) and a normalisation in the tax expense to R30.344-million (December 2017: R47.494-million). The company recovered from a disappointing performance in the previous year.

“While the economy remains challenging, we are confident that we are continuously improving our offering to ensure that we deliver value to our primary client segments. Our future success will be underpinned by our ability to generate top-line growth through growing our client base while stabilising costs and managing credit risk,” says Sassoon.

He says that the group will continue to enhance its value proposition and distribution capabilities to its five primary client segments — small business, medium business, asset suppliers, private clients and institutional clients. “This includes growing our fintech capabilities, incorporating credit and forex into our B\\YOND platform, ensuring cash flow support from SMEs through asset finance; further growing clients’ global wealth and taking advantage of our strong position to grow institutional assets under management.

But through all the change, Sassoon says that the purpose and vision of the business have not changed. It will continue to support local business growth and the wealth of its pool of global investors.

From an investor perspective, getting a piece of the action might prove a tad more difficult. Kooyman says the share is extremely illiquid. There are only about 1,000 shares in circulation.

“Even though the share is trading at very cheap levels currently,” he says, “we are wary of increasing our stake, because if things go wrong — which in the current economy is a possibility — it will be difficult to liquidate our position.”

“That is why so few fund managers pay attention to the stock and the price is so mismatched with the market,” he adds. DM