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

After the Bell — does South Africa need another two banks?
(Photo: Daily Maverick)

I can’t get over the sense that South Africa is overbanked. Here is why little red lights are flashing for me.

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

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  • Iam Fedup says:

    When I saw the headline, my immediate thought was overwhelmingly, “Yes!” The big five are all incredibly arrogant, their customer service stinks, and they are cynical beyond compare. (A notable exception is Capitec.) But… when I read the article, I thought Tim and the anonymous reader were incredibly right. Heaven forbid that the ideologues create a bank from nothing, black empowerment or not. Besides, the last time I looked, a whole bunch of executives from the banks do include black people – or are they merely BEE window dressing? Their cowardice in speaking out about the terrible state of our country seems to reflect this. So, is it all just another election ploy to show the masses, “Oh look at what we are doing for you”? (And, by the way, Old Mutual had Nedbank as its bank, screwed that up, and haven’t exactly covered themselves in glory when it comes to customer experience.)

    • Iam Fedup2 says:

      Fully agreed that Old Mutual haven’t covered themselves in glory re customer experience.

      But do you know much about the separation of OM and Nedbank? They were very much two separate entities that were lumped together after the managed separation from Plc in 2018, and they never got along…and when Nedbank started looking into its own Life licence, that was probably the final straw for Old Mutual. So they separated. I would hardly call it Old Mutual “running a bank” in the context of the new bank they’re starting…

  • C S says:

    Wasn’t there much fanfare about a women black owned bank recently? It had a huge media circus then it was cricket’s. I doubt it even exists anymore and this makes me very concerned a when I read about the PostBank.

  • William Kelly says:

    It’s pure ideology. But I am all for a PostBank. Yeah baby! I’d take out a massive loan, default and wait for other sucker taxpayers to bail it out. I’d call it payback for all my taxes stolen by those that “work” for government in State Capture without prosecution – a meagre financial compensation for my emotional sufferings endured watching blue light brigades and a destroyed NPA entrench and defend these parasites stealing my money and killing the poor for whom it was intended in the process.

  • Temba Morewa says:

    I hate banks! We need an autonomous and electronic bank which will allow us full control of each and be very aspect of our money! The bank should enable transactions authorized by the client and keep money, transactions and information safe and private and not interfere in any way. For example: A client should be able to stop any debid order at any time or allow any payments at any time as s/he wishes. Payments should not be delayed accept if decided by the client!

  • Michele Rivarola says:

    I suppose Capitec is not a bank and neither is Discovery nor is Tyme. The power of brain washing and misinformation resulting in substantial ignorance is astounding.

    • Andrew R says:

      They are specifically discussing the five biggest banks, that is clear in the article, there is no misinformation in that regard. If they had to include every bank, the article would take hours to read, but their client bases are not substantial enough to be considered a big bank.

      • anton kleinschmidt says:

        Capitec has the largest number of retail clients of all the banks. The recent surge in the rats and mice banks all think that they can emulate Capitec. They cannot because they do not have the ability, skills and intellectual depth of the Capitec founders. They saw a gap and they FILLED it. We do not need more banks.

  • Geoff Coles says:

    I seem to recall a few days ago seeing that deposits at Postbank are down R500 million

  • Andrew R says:

    Doesn’t Old Mutual do banking already? Or have I imagined it? There were even branches in some malls?

    • Iam Fedup2 says:

      They didn’t do fully-fledged banking – they paid for a licence though Bidvest bank that allowed them to have a very basic MoneyMarket-type account.

      The new bank will be full-service, and is being built separately from the IT infrastructure of the rest of Old Mutual (which is horrendously outdated) to give the bank the best chance of succeeding. I am optimistic about it actually, it’s not a legacy-baggage-already-failed entity, it’s a brand spanking new bank with some super impressive leaders that Old Mutual poached to lead its bank build (specifically Rolf Eichweber, who was the CEO and co-founder of TymeBank).

  • Phil Baker says:

    Any reason you didn’t mention Capitec? – they seem to be serving the former post bank client base – and making excellent profit – couldn’t they just occupy he PO branches until they close them down and go online like the rest?
    Also dont agree that the big 5 are “incredibly competitive” they are a cartel and charges are WAY above other developed countries

  • I am a former US bank regulator and part time South Africa resident. My experience of SA banking is that the banks are not user friendly and could use closer supervision to ensure they fully meet the needs of their customers. The remedy is certainly not to “increase competition” by creating a brain-dead government bank. The history of government post banks, and insurers like Old Mutual entering banking for that matter, is not a happy one around the world. Failure is definitely an option. So it would behoove government to concentrate on promoting safety, efficiency and service among existing banks, not put a zombie among to “liven up” the market.
    John Walsh
    Former US Comptroller of the Currency
    Zinkwazi Beach KZN

  • Stan Davis says:

    Hi Tim,
    As a former employee of the PIC (that was then known as Public Investment Commission and could have been mistaken as a subsection of the Dept of Finance, and later renamed Treasury by Maria) I think the answer lies in the BITCOIN. They cannot be stolen because they do not serve as tips (to insure prompt service) and the Kings clothes were paid for by this new kind of invisible coin

  • Lisbeth Scalabrini says:

    To operate a bank, which amount must a company possess as equity (own capital reserve)?

  • D'Esprit Dan says:

    The only thing SA doesn’t need is another cash cow for the comrades, cadres and co-looters. That’s it. Happy for properly regulated and financed banks to pop up like mushrooms as long as they’re properly run and don’t steal from depositors and crash financial systems. Maybe the big banks would actually give a damn about clients then!

  • Johan Buys says:

    We will get at least one more bank : the bank of last resort for cadres that are denied banking by the other banks.

  • Balisa Finca says:

    Yes they do! It’s high time the banking oligopoly is broken.

  • Robert de Vos says:

    Considering the obscene pay cheques that banking CEOs earn, tens of millions, by all means in a free market, but not at these salaries. … “Gerrie Fourie from Capitec earned R62 million in the group’s latest financial year. Sim Tshabalala of Standard Bank received R54 million, Alan Pullinger of FirstRand R48 million, and Jacques Celliers of FNB just under R42 million. Arrie Rautenbach at Absa received about R46 million, and Mike Brown of Nedbank just under R44 million.” Moneyweb.

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