New challenger with old roots
Charles Russell
#themes: Challenger bank, growth, IPO
Event: We initiate coverage of African Bank, a presently unlisted diversified challenger bank, planning a future IPO.
Background: The African Bank heritage hails back to 1975, now returning to the market as a predominantly deposit-funded diversified consumer and business bank serving 5.7m clients via 446 access physical access points and 4,087 employees. The bank plans to list on the JSE after meeting certain financial hurdles (most notably: R65bn net loan book, R2.5bn net profit and 15% ROE) – likely from 2027.
Key strengths: The current management team comprises many seasoned bankers. Their years of experience at competitor banks will likely stand them in good stead to take advantage of a (hopefully) nascent improving macro environment (lower rates and inflation coupled with high economic growth) while building out a challenger bank that is diversified across segment and product. The strong NIMs (10.2%) are achieved by a predominantly deposit-sourced funding base and high-yielding consumer loans, while recording relatively contained credit losses (CLR of 6.6%). Major opportunities include growing the revenue to fit the existing cost base, involving NIR growth (transactional fee income and insurance offerings into the growing customer base) as well as loan book growth (predominantly business banking, but also secured consumer loans).
Key risks: Loan book growth is one of the key determinants of future profit growth. While management might be able to grow the book strongly over the coming years (indeed aspirations are above our forecasts), credit quality and deposit funding concerns will naturally arise. Management focus is another key risk, navigating a tough economic cycle, bedding down several acquisitions, growing into key market segments (i.e.: business banking) and developing products for the needs of the growing customer base (i.e.: funeral insurance, secured lending, etc).
Valuation (R11bn to R17bn): We calculate a valuation range of 0.8x-1.2x P/B, the top end of which yields a c.R17bn valuation (c.R34/share) based on 1.2x 2025E NAV. While this can be justified by strong potential profit growth over the coming years, the relatively low ROE at present detracts from valuation.
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