Following the demerger of Nedbank in 2018, Old Mutual will create a bank in 2024

Old Mutual has announced that it has applied for a banking license and plans to open a full transactional account in the second half of 2024.

The insurer will enter an increasingly crowded market after the arrival of Discovery, TymeBank and Bank Zero in recent years. African Bank is also on the rise again, having opened over a million transactional accounts (and buying troubled Ubank in August, potentially giving it access to millions more retail customers).

The irony, of course, is that from 1986 to 2018 Old Mutual owned a majority stake in one of the country’s big four banks, Nedbank.

In 2016 it announced it would split it into four companies – Old Mutual Emerging Markets (its core African unit), Nedbank, Quilter (the UK wealth manager) and US wealth management firm OMAM (now BrightSphere).

The theory was that the four companies were so different that they stood on their own and, more importantly, that the sum of these components would exceed what the market had attributed to Old Mutual plc.

In this managed separation process, the majority of its 52 percent stake in Nedbank was unbundled to Old Mutual shareholders in 2018.

It retained a “strategic” stake of 19.4%, which was reduced to around 7% after a second divestment in November last year.

Expect that residual stake to be safely sold or unbundled after it announces its intentions.

The problem was that Old Mutual never wanted – or needed – to own an entire bank.

Nedbank is much more than just a company that has a few retail account holders. It has a sizable commercial and investment bank, an asset unit, offices in SADC countries and a 21% stake in ETI (Ecobank Transnational Incorporated SA).

A 52 per cent stake (with executives from the parent company in London) made the situation more complicated than it needed to be.

Nedbank’s market cap today is more than double that of Old Mutual (R114bn vs. R52bn).

Old reciprocity knows that it is necessary to play in the transaction space. It already offers a basic account, the Cash Account, licensed by Bidvest Bank. This is primarily marketed to its mass and foundation customer bases. (It also offers an unsecured lending product to these customers, saying it is “already making a strong contribution to the group’s profitability.”)

construction of a bank

The group has never disclosed the number of Money account holders but has a total of 6.2 million customers in South Africa. It also boasts 1.1 million digitally active customers. Its banking app has over a million downloads on the Google Play Store and although this app is also used for its rewards program, this still suggests that it has a non-negligible number of banking customers.

In last year’s annual report, it listed “accelerating growth in transactional banking” as one of its three medium-term goals.

It appears that Old Mutual and Bidvest Bank have clashed over the potential of this foray into banking, possibly over product design and very likely over fee structure. Or, as Old Mutual politely put it, “A divergence of aspirations requires that we re-evaluate our future arrangements to meet the needs of our customers.”

Building your own bank will ensure that the risk of relying on a third party is managed. Owning its own bank will also allow it to “maintain the primary relationship with our customers” and ensure it better cross-sells its products. A license will also allow it to “accept retail deposits, thereby providing a cheaper source of funding.”

Old Mutual has already spent R830 million to build a transactional banking engine and will spend a total of R1.75 billion in investments.

The banking unit is expected to break even three years after launch, and “as the capability matures post-breakeven, the return is expected to be well above the target return of 4% above the cost of equity.”

Insurers against banks, banks against insurers

Following this move, two of South Africa’s five largest insurers will have entered the banking business.

One of the five, Liberty, was bought by its (former) parent Standard Bank, while FNB, Absa and Nedbank have all steadily entered the insurance market.

FNB was the most aggressive of the three as it became free to play in the space following the split of RMB and RMI (parent company RMH previously owned stakes in Discovery, Momentum Metropolitan and Discovery).

Capitec confirmed to the market that it was granted a life insurance license last month.

In an economy growing just over 1%, there are few opportunities for growth.

While growth rates across the rest of the continent dwarf local ones, the scale of many of these opportunities pales in comparison to our banks and insurers’ home markets. This explains many of these movements over the past five years.

Your move Sanlam?

This article originally appeared on Moneyweb and has been republished with permission.
Read the original article here.

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