Deposits: A key deliverable

#themes: Challenger bank, growth, diversification

Event: We have done a deep dive into African Bank’s strategy of building a deposit franchise by focusing on growing its deposits (both retail and business) and transactional banking accounts. We aim to see how realistic management’s expectations are, and if there are hidden risks in achieving the goals.  

Background: Building a strong client deposit franchise is an important strategic objective for African Bank, as it stabilises the bank away from the old funding model of 100% wholesale funding, improves non-interest revenue (NIR) through transactional activity and potentially boosts net interest margins (NIMs) if retail transactional accounts, which attract lazy deposits, can grow faster than other types of deposits. Retail deposits are currently as much as 53% of the total deposit base and have strongly improved the cost of funding since FY21 (from 1.3x the prime interest rate to 0.7x in 1H25). 

Deposit pricing: Supported by acquisitive growth, the latest BA900 data to June 2025 shows that African Bank has the highest annual growth in deposits across all the banks (including other challenger banks). For organic growth, we note that African Bank is paying up more than its peers for long-term retail fixed deposits, and that its interest expense as a percentage of deposits is the highest of the peer group (which could narrow over time with the benefit of a Deposit Insurance Scheme). However, with high retail NIMs, and a higher risk-adjusted group NIM than the Big Four banks, we are comfortable that while it is paying up for building a deposit franchise, it is not at a level that is putting undue pressure on overall profitability.  

Deposit growth: We believe our forecasts for deposit growth to FY27e are realistic, and if anything, still have some upside risk. We forecast that the loan-to-deposit ratio (LDR) will remain the same through the forecast period, but management is hoping to drive it down from 1.3x with stronger deposit growth (the banking sector average is 0.9x). The effectiveness of African Bank’s retail deposit growth strategy will depend in part on the attractiveness of its retail transactional account (MyWORLD), its new transactional account for small businesses, and the reach that it generates into potential retail customer bases through its partnership strategy. We caution that Lesaka’s recent acquisition of Bank Zero is likely to curtail some of the growth in Alliance Banking.

Conclusion: Of all the strategies that African Bank has highlighted in its path to an initial public offering (IPO), we feel that the achievement of a healthy retail deposit franchise is one of the most important, and will need to be closely monitored. We have not changed our FY25e forecasts in this report, and believe that we have been fairly conservative in our deposit growth forecast. We maintain our FVVR range of R11bn-R17bn.

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