Understanding Absa’s acquisition of Bankorp
03 November 2017
Many readers of this blog may have seen news reports referring to a leaked provisional report of the Public Protector, in which she recommends that the government should pursue a claim against Absa Bank. The article in the Mail and Guardian of 13 January 2017, puts the amount at R2.25bn.
We issued a detailed media statement in response to the article and are not commenting any further. Instead we are preparing detailed submissions to the Public Protector in order to assist her to complete the investigation and publish a final report.
Since the issue is generating so much discussion, we have decided to briefly outline the history of our involvement.
In 1985 one of South Africa’s largest banks at the time, Bankorp, approached the SA Reserve Bank for assistance of some R300m. The reason was that its aggressive lending and acquisition strategy of the preceding decade had resulted in great difficulties when the South African economy went into recession. This meant it could no longer guarantee depositors that they would be able to make withdrawals.
By 1990 it was clear to the SA Reserve Bank that Bankorp’s financial difficulties were far greater than previously estimated. Many clients and customers who had loans with the bank could not repay them. The SA Reserve Bank agreed to provide further assistance for a period of five years, which would expire in 1995.
The salient terms of the agreement between the SA Reserve Bank and Bankorp, among other parties involved were:
- The SARB provided a total loan amount of R1.5bn to Bankorp at an interest rate of 1%.
- 1bn of this amount was used to purchase government bonds which yielded an interest rate of 16%. The remaining R400m was held by the SA Reserve Bank.
- Instead of paying each other 1% and 16% interest respectively, the parties agreed to off-set the two interest rates against one another with the outcome being that Bankorp would receive 15% interest income instead of 16%.
- This translated to R225m per annum. This annual income of R225m was to be used to write off bad loans.
- Absa inherited this arrangement when it took over Bankorp on 1 April 1992. Negotiations with the SA Reserve Bank for the official transfer of this agreement from Bankorp to Absa were concluded in 1994, and it was backdated to 1 April 1992, the day Absa took over Bankorp.
Bad loans are also referred to as 'bad assets', a term many may have become familiar with during the 2008 global financial crisis. When a Central Bank or government intervenes in this way, it is to help to write off the bad debts. This means it partly or fully settles the debts of customers who otherwise won’t be able to pay.
This is a drastic intervention that is done in order to prevent the collapse of confidence in the entire banking system, or to prevent a bank from being liquidated together with the life savings of people who are customers of the bank. Furthermore, allowing some companies under financial distress to collapse would have disastrous socioeconomic consequences including job losses.
This is why in 2008, the US government and US Federal Reserve injected hundreds of billions of dollars into banks and large industries such as the motor industry.
When Absa began proceedings to acquire Bankorp, it conducted a detailed due diligence in order to determine Bankorp’s nett asset valuation and therefore the offer price of the acquisition. At the time the assistance of R1.1bn had already been secured from the SA Reserve Bank by Bankorp.
In negotiating an offer price, the parties could either agree to include the impact of the SA Reserve Bank’s debt write-off or exclude it. If it was to be excluded, then Absa could determine that there were too many bad loans and walk away or pay a much lower price. Including the SA Reserve Bank package, would mean a much higher price. In the end the agreement was for Absa to pay the higher price that included the expected assistance from the SA Reserve Bank. This was set at R1.23bn and the acquisition took effect on 1 April 1992. This was seven years after Bankorp had initially approached the SA Reserve Bank.
In 2000, Mr Tito Mboweni, then Governor of the SA Reserve Bank, appointed High Court Judge, Dennis Davis, to head a Panel of Experts to investigate the matter. At the time there were many rumours that 'billions of rands' had been looted and taken out of the country.
In 2002, the Davis Panel found that, while the arrangement put together by the SARB to rescue Bankorp from collapse had been ultra vires (fell outside the SARB’s powers), Absa had paid fair value for Bankorp, since the expected SA Reserve Bank assistance of R1.1bn had been factored into the acquisition price. It also determined that if any restitution claims were to be initiated it would have to be against the shareholders of Bankorp who had benefited from the acquisition price paid by Absa. The Davis Panel concluded that Absa had not benefited from the SA Reserve Bank’s rescue package.
The due diligence documents that explain the R1.23bn valuation for Bankorp, the contracts with the SARB, auditor’s reports with the details of each of the 91 000 clients and customers whose debts were partially or fully written off as part of the SA Reserve Bank’s assistance were referred to in our initial response to the Public Protector (before the provisional report). We offered the Public Protector the opportunity to examine these documents for as long as she wishes on no less than two occasions, and her office has now confirmed that she will do so.
It is common cause that Bankorp was in deep financial crisis and that it is the function of Central Banks to prevent systemic problems such as what seemed likely in this case. For many years there has been an allegation that the SA Reserve Bank’s intervention was unwarranted and that the money was transferred overseas. No evidence was ever produced to this effect. In any case a full account of what happened to the money is available through auditors’ reports submitted to the SA Reserve Bank as a condition of the assistance.
The Davis Panel Report is detailed, and can be downloaded here. To date it remains the only transparent account of what happened that is available in full to the public. Please take the time to read it in order to have the necessary background information when the final report of the Public Protector is released.
Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.