Origin story crucial to Ubank’s slide

As Reserve Bank governor Lesetja Kganyago put it when he announced that one of SA’s smallest banks, Ubank, had been put under curatorship: “This is a very strange situation.”

The curatorship is a strange and unusual story. But the bank itself has an unusual and complicated story, which is about SA’s history of mining and migrant labour — and the efforts to repair things in recent decades.

This is only the third bank curatorship in SA in almost two decades, and usually when the banking regulator has to go that route it is because of a run on a bank’s deposits that causes a liquidity crisis, even though the bank may be solvent. But Ubank’s liquidity is perfectly fine, thanks to a deposit base comprising almost entirely small, sticky retail deposits.

Its problem is that it has almost no capital left after three years of significant losses, and has proved unable to raise what it needs to meet regulatory requirements, despite efforts to do so over the past two years. The regulatory requirement for a small bank such as Ubank is at least 20%, and SA’s banking sector has an average capital ratio of more than 15%.

Ubank’s has plummeted to about 3%. And the ratio could prove to be even lower — it is always a red flag when a bank is late with its audited financial results, and Ubank’s for the year to February have yet to appear.

Ubank used to be Teba Bank. The Employment Bureau of Africa (Teba) went back to 1912, when it took over from entities such as the Witwatersrand Native Labour Association as the agency that recruited and processed migrant labourers for the mines.

It is not such a happy history, though in recent decades Teba has become a company that focuses on providing occupational health services to mineworkers and their communities and helping them with benefit claims and other services.

The National Union of Mineworkers’s (NUM) founding president, James Motlatsi, bought Teba from the mining industry in 2005. The bank, which started as a savings trust for mineworkers in the 1970s, gained a commercial banking licence in 2000 and, in 2010, was rebranded as Ubank.

It is still owned by a mineworkers’ trust, whose trustees are drawn equally from NUM and the Minerals Council SA. The trust is required to make decisions by consensus. This cannot be easy, and the fact that NUM claimed this week to be shocked at the curatorship, while the Minerals Council SA welcomed it, is a bit of a giveaway.

But all of this is the crucial background to the slide that culminated in the decision by the Reserve Bank and finance minister to choose curatorship, a decision that is always a last resort for banking regulators.

The bank is tiny in the context of the SA banking sector, with a balance sheet of just R5.23bn and about 4.7million accounts held by probably just more than 300,000 customers, most of them mineworkers and their families, with a network of branches in old mining towns and remote rural areas.

The intention of the rebranding was to broaden the bank’s horizons and expand its product and customer bases. But it has struggled to do that. There wasn’t the agility or innovation that would have been required, nor the investment. A relatively high cost structure and instability in management did not help, nor did Covid-19.

With losses eating away at the bank’s capital, an injection of capital was badly needed. Essentially, that had to come from an outside shareholder — and Ubank apparently had multiple suitors, including other licensed banks. It is not hard to imagine that some of the large banks would have been keen to acquire its customer base and rural footprint.

However, most potential investors wanted to buy the whole bank, or at least a majority stake, to justify putting in the amount of capital it needed and the integration costs. The trustees (or some of them) were not willing to sell more than a certain percentage.

The banking regulator has for the past two years intensified its supervision, as it always does quietly behind the scenes when banks run into troubles, which often is quietly resolved in the end. This time the regulator rushed for Ubank to sort out its loss-making business model and gave it time to raise the capital it needed.

Reading between the lines of finance minister Enoch Godongwana’s comments this week, there was a deal that was rejected late in 2021. The minister alluded to disagreements between the bank’s board and the trustees, as well as the bank’s failure to come up with a credible action plan.

However, with Ubank’s finances deteriorating and regulators surely worrying that the capital crisis could turn into a confidence crisis, curatorship was the only option. It will keep the bank open for business, but puts curator Zola Beseti in charge of its fate. It will safeguard the savings of depositors, as curatorships are meant to do.

In the almost two decades since SA’s 2002/2003 small banks crisis, the only times the regulator had to resort to curatorship were at African Bank in 2014 and VBS Mutual Bank in 2018. UBank is quite different from both. There is no suggestion of the kind of risky lending that triggered a confidence crisis at African Bank, whose curatorship ended successfully with the emergence of a new, stronger bank. Nor is there any hint of the corruption and fraud that sank VBS, which the curator found was so rotten it had to be put into liquidation.

We can all hope for an African Bank outcome rather than a VBS scenario. But it’s complicated. There are emotions and politics and history involved. And while selling out to a larger player with deep pockets could well mean cheaper and better financial services for Ubank’s customers, there is a real concern that it could also result in the closure of branches in rural areas and small towns that are poorly served by larger players.

It is, as Kganyago said, a strange situation. It will be intriguing to watch how it unfolds.