Why VBS Bank imploded
A rise in loans and advances in defiance of regulation caused liquidity problems, even as capital reserves remain stagnant
VBS Mutual Bank’s curatorship — SA’s second bank curatorship in fewer than four years — has ruffled a few feathers. Some people are crying foul, saying the bank is being victimised for the R7.8m loan it granted former president Jacob Zuma in 2016 to repay the state for upgrades to his Nkandla homestead. But the bank’s financial statements make for instructive reading.
At the heart of its challenges is an asset-liability mismatch: it was accepting short-term deposits from municipalities — unlawful in any event in terms of the Municipal Finance Management Act — and lending these funds out over the long term in the form of home and vehicle loans.
All commercial banks do this in some shape or form. If Absa, FNB, Nedbank or Standard Bank customers all decided to withdraw their deposits tomorrow, the banks would not be able to find the money to repay them. But these institutions have millions of customers and a variety of funding lines, which mitigates the risks.
However, the bulk of VBS’s deposits come from just 21 municipalities. The amounts average between R50m and R100m, says Reserve Bank deputy governor and registrar of banks Kuben Naidoo.
As these deposits matured or were terminated, VBS quickly ran into a cash-flow crisis.
The trouble seems to have been caused by rampant growth in the bank’s balance sheet, which doubled in size over the 12 months to March 2017. The bank’s assets jumped 537% between 2014 and 2017, from R330m to R2bn, driven by a 416% increase in the loan book from R210m to R1bn.
The amount VBS owed its depositors more than doubled between 2016 and 2017 to nearly R1.6bn on exponential growth in notice and fixed-term deposits from municipalities. Growth in loans and advances was similarly impressive, jumping 56% to R1bn, as VBS dished out more home loans, vehicle loans and overdrafts.
The growth in loans brought with it an increase in bad debts, with expected losses on nonperforming loans increasing from R1.9m in 2016 to R6.3m in 2017.
In addition, mortgages and other short-term loans that were granted to the bank’s own executive directors, who number at most five, went from just R82,089 in 2016 to R4.1m in 2017, more than the bank’s after-tax profit of R3.2m. Loans to nonexecutive directors — some of whom, like chairman Tshifhiwa Matodzi, also enjoyed exponential salary increases over the year — followed a similar pattern.
Matodzi, who has resigned as chairman of Vele Investments, VBS’s 53% shareholder, penned a strongly worded letter to Naidoo last week. Matodzi says compliance issues raised by the Reserve Bank "increased tenfold" after black management was appointed at VBS. The bank was "confused" by discrepancies between the Municipal Finance Management Act and the Public Finance Management Act, which allows it to bank state entities and departments but not municipalities.
Treasury says the rationale for this exception is that funds meant for service delivery must be managed "as responsibly as possible", meaning they should lie with commercial banks, which are subject to much stricter rules than mutual banks.
According to Matodzi, VBS tried repeatedly to engage the Bank and treasury. He says treasury’s instructions to municipalities to withdraw funds from mutual banks to resolve the matter of the regulation — which treasury says it has been trying to do since late 2016 — caused a "run on the bank". This effectively sabotaged VBS and its plan to apply for a fully fledged commercial bank licence, he says.
However, in an interview with radio station Power FM this week, Naidoo said that, had the Reserve Bank not intervened, VBS would have gone bust. Clearly, shareholders Vele, Dyambeu Investments and the Public Investment Corp, which holds a 27% stake in VBS, were not willing to come up with additional funds. "We think there is a possibility that VBS can be salvaged [under curatorship]. It was not our intention to derail the bank. We have every desire to see it succeeding," says Naidoo.
SizweNtsalubaGobodo’s Anoosh Rooplal is the curator.
If African Bank, which re-launched less than two years after it was placed under curatorship, is anything to go by, this will not be the end of VBS.