Following the unbundling of Nedbank in 2018, Old Mutual plans to launch a bank in 2024

Old Mutual has applied for a banking licence and plans to launch a full transactional account in the second half of 2024.

Following the recent entry of Discovery, TymeBank, and Bank Zero, the insurer will join an increasingly crowded market. African Bank is also making a comeback, having opened over a million transactional accounts (and in August it bought troubled Ubank, which potentially gives 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.

It announced in 2016 that it would be divided into four businesses: Old Mutual emerging markets (its core African unit), Nedbank, Quilter (the UK money manager), and OMAM (the US asset management firm) (now BrightSphere).

The theory was that the four businesses were distinct enough to stand alone, and that the sum of those constituent parts would exceed the market value of Old Mutual plc.

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

It kept a 19.4% “strategic” stake, which was reduced to around 7% following a second unbundling in November of last year.

Now that it has announced its intentions, expect this residual stake to be sold or unbundled.

The issue was that Old Mutual never wanted or needed to own a whole bank.

Nedbank is much more than a bank with some retail account holders. It has a sizable commercial and investment bank, a wealth management division, SADC operations, and a 21% stake in ETI (Ecobank Transnational Incorporated SA).

A 52% stake (with parent executives based in London) made the situation more complicated than it needed to be.

Today, the market capitalisation of Nedbank is more than double that of Old Mutual (R114 billion vs R52 billion).

Old Mutual understood the importance of entering the transactional space. It already provides a basic account, the Money account, under the licence of Bidvest Bank. This is primarily marketed to its mass and foundation customer bases. (It also provides an unsecured lending product to these customers, which it claims “is already a significant contributor to group profitability.”)

Creating a bank

The number of Money account holders has never been disclosed, but the group has 6.2 million customers in South Africa. In addition, it boasts 1.1 million digitally active customers. Its Banking app has over a million downloads on Google Play, and even though this app is also used for its rewards programme, this suggests that it has a sizable number of banking customers.

It listed “accelerate growth in transactional banking” as one of its three medium-term goals in its annual report last year.

It appears that Old Mutual and Bidvest Bank disagreed about the potential of this banking push, possibly over product design and, most likely, fee structure. Or, as Old Mutual blandly put it: “a divergence of aspiration requires us to reassess our future arrangement to deliver on our customer needs”.

It claims that establishing its own bank will eliminate the risk of relying on a third party. Having its own bank will also allow it “to hold the primary relationship with our customers” and improve cross-selling. A licence will also enable it to “accept retail deposits, thereby providing a cheaper source of funding”.

Old Mutual has already spent R830 million on developing a transactional banking engine and will spend a total of R1.75 billion on capex.

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

Insurers vs banks, banks vs insurers

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

Liberty, one of the five, has been purchased by its (former) parent Standard Bank, while FNB, Absa, and Nedbank have all steadily entered the insurance market.

Capitec confirmed to the market last month that it had been granted a life assurance licence.

There are few opportunities for growth in an economy growing at just over 1%.

While growth rates on the rest of the continent dwarf those here, the scale of many of those opportunities pales in comparison to the home market of our banks and insurers. This explains many of the changes that have occurred in the last five years.