SAPO on its separation from Postbank

Meeting report

The Chairperson convened the virtual meeting and welcomed the delegation from the South African Post Office (SAPO), the Postbank, and the Department of Communications and Digital Technologies (DCDT).

The SAPO consisted of Mr Jerel Ruthnam, Acting Group Executive: Strategy; Ms Zukiswa Ntsikeni, Group Executive: Operations; and Ms Tia van der Sandt, Acting Chairperson of the Board of Directors.

The delegation from the Postbank consisted of Mr Molatlhegi Kgauwe; Interim Chief Executive Officerp; and Ms Nomkhita Mona, Chief Executive Officer.

The delegation from the DCDT consisted of Ms Nonnkqubela Jordan-Dyani, Acting Director-General; and Ms Zaytoen Anthony, Chief Director: State-Owned Company (SOC) Oversight.

The Committee noted apologies from Ms Stella Ndabeni-Abrahams, Minister of the DCDT; and Ms Pinky Kekana, Deputy Minister of the DCDT.

Ms Reneilwe Langa, Chief Director: Postal Oversight, was also in attendance.

SAPO on its separation from Postbank

The first item on the agenda was for the Committee to be briefed by SAPO on its separation from the Postbank. The briefing included an update on the progress made and the status of the Postbank’s licensing application process, a background on the bank controlling company (BCC) developments, and a status update on the amendments to the Postbank Act 9 of 2010 to implement the BCC structure.

Ms Jordan-Dyani, Acting Director-General of the DCDT, presented the briefing.

The Postbank’s legislative and regulatory framework:

The legislative and regulatory framework of the Postbank was based on the Postbank Act, the South African Post Office Act 22 of 2011, the Banks Act 94 of 1990, the Public Finance Management Act 29 of 1999, the Financial Centre Intelligence Centre Act 38 of 2001, the Protection of Personal Information Act 4 of 2013, the Companies Act 71 of 2008, and the Regulations of the South African Reserve Bank (SARB) and the National Treasury, including other protocols on good governance such as the King IV Code of Good Practice.

Postbank was geared to comply fully with the relevant legislation after the banking licence was obtained so that the entity could become a leader in enabling a connected and digitally transformed South Africa.

Status of progress — Postbank’s licensing application process:

The Postbank reported on the progress with its licensing application process, together with the relevant legislation. The application for authorisation to establish a bank (section 12 of the Banks Act) had been completed. The South African Reserve Bank's (SARB’s) co-dependencies included the appointment of directors and executives following fit and proper assessments in terms of section 9 of the Postbank Act, section 13 of the Banks Act, and Regulation 43 of the Banks Act Regulations. This included the determination of the extent of the business to be transferred from the SAPO to the Postbank, including the split of assets and liabilities and subsequent adjustments. The date of the business transfer was determined to be 1 April 2019 (section 6 of the Postbank Act). Financial projections for a three-year period and a five-year period also had to be established (section 12 of the Banks Act). The SARB’s processing of the request for authorisation to establish a bank (in terms of section 12 of the Banks Act) had been completed successfully.

In addition, the approval was granted by the SARB (in terms of section 13 of the Banks Act), with stipulated regulatory, administrative and general conditions. The application for the Registrar’s approval to form the Postbank company was approved, in terms of section 15. The Postbank company was incorporated, and a successful application was made to register it as a bank, in terms of section 16. The only steps that still had to be completed was the application to register a BCC in terms of section 43 of the Banks Act.

Background on the BCC structure determinations

A BCC structure was required to be registered in terms of the section 43 of the Banks Act, to exercise control over the Postbank. The shareholder of reference for capital adequacy and in terms of compliance and submission of statutory monthly returns was stipulated in the Banks Act’s Regulations and circulars. The implication was that the BCC would step in to recapitalise and support its subsidiary bank if it ran into financial difficulties. One of the key requirements was that the BCC must be in a financially sound position in terms of section 44(2)(e) of the Banks Act. Meanwhile, section 3(2) of the Postbank Act stated that, “upon the incorporation of the Postbank Company, the SAPO shall be the sole member and shareholder of the Company,” implying that the SAPO needed to be registered as a BCC for Postbank.

The challenges and risks involved in the BCC determinations included that the BCC must be in a financially sound position in terms of section 44(2)(e) of the Banks Act. It was reported that the SAPO was not in a financially sound position to meet the requirements for registration as a BCC. There was a very high capital adequacy requirement if the SAPO were to be the direct shareholder of Postbank. The SAPO’s non-banking services posed a threat to the safeguarding of depositors’ funds, in that the government would be obliged to provide on-going financial support to the SAPO in order to maintain the BCC-structure position.

The appropriate reporting structure of the BCC had to be determined, and various options were considered to determine the optimal option by the DCDT and the National Treasury, in consultation with the SARB and the SAPO. Five options that were considered were outlined to the Committee, and included having:

• the SAPO as the BCC;
• the BCC as a standalone;
• the BCC as a subsidiary of the SAPO;
• the BCC as a holding company; or
• the SAPO as the holding company.

The second option -- having the BCC as a standalone -- was recommended by the National Treasury. This option makes the Postbank report directly to the DCDT through the establishment of the BCC between the entities. The Postbank was selected as the optimal BCC ownership option, as it had the least financial implications for the bank, based on the results of the financial audits on the capital costing requirements of the various options. The SAPO’s financial and liquidity position did not allow for the BCC to report to it, which reinforced the selected option. Upon the enactment of the Postbank Bill, the BCC for Postbank would be registered in terms of section 43 of the Banks Act, to exercise control over the Postbank. This would conclude the Postbank licence application process.

Purpose and progress on amendments to Postbank Act

The South African Postbank Amendment Bill of 2020 had the purpose mainly to amend the Postbank Act in order to mitigate against the risks associated with the structure envisaged in the Postbank Act, which made the SAPO the sole owner and shareholder of the Postbank. This would have the effect of providing for the adjustment to the establishment and shareholding arrangements of the Postbank through the creation of a new BCC, and to facilitate the establishment and registration of the BCC. The Minister of the DCDT, as the shareholder governmental department, would be responsible for the Postbank as a standalone company on behalf of the South African government. This was to be effected by establishing the BCC between the Postbank and the DCDT in the reporting structure. In addition, the Postbank Amendment Bill would also amend other sections of the Postbank Act impacted by the change in the Postbank reporting structure.

Regarding the progress on the Postbank Amendment Bill, this was developed by the DCDT in consultation with the key stakeholders, including the SAPO, the Postbank and the National Treasury. It was submitted and presented to the Economic Sectors, Investment, Employment, and Infrastructure Development (ESIEID) cluster after certification by the relevant authorities. The Office of the Chief State Law Advisor was responsible for the legal drafting.

The Postbank Amendment Bill was supported by the ESIEID-cluster and supported the submission to the Ministerial Cluster after the following comments were addressed:

• The process related to the development of a state bank needed to be considered, and this should not unnecessarily delay the completion of the amendments to the Postbank Act. The DCDT had consulted National Treasury and reached an understanding that the engagements could continue without putting delays on the Postbank’s licensing application process, which was in its final stages.
• The risk associated with the funding of the implied restructuring process of the SAPO needed to be addressed. The National Treasury had submitted that it had considered the fiscal risks that the different options presented, and that the DCDT had settled on the most workable option from the point of view of the current legislation. It had also agreed that the costing of the restructuring of the SAPO would need to be fed into the budget process, considering the impact of the unbundling on the solvency of the SAPO.

The Cabinet had approved the Postbank Amendment Bill for public comments, and the DCDT was currently in the process of reviewing the comments after the submission period had closed.

The proposed amendments to the Postbank Act were outlined to the Committee in detail [see attached presentation]. The proposed amendments pertained to sections 2, 3, 6, 9, 10, 12, 13, 15A, 17, 18, 19, 20, 20A, 23, 24 and 28 of the Postbank Act. Most notably, the amendments included the insertion of a section into the Postbank Act to provide for the functions of the established BCC, and for the BCC to operate only as the Postbank BCC, and to hold 100% of the shares in the Postbank. This provision further provided for the BCC to exercise additional oversight over the Postbank and ensure that the BCC exercised sound risk management and governance practices, in line with the SARB’s requirements of the Banks Act and its regulations.

Regarding the reorganisation of the SAPO in response to the amendments to the Postbank Act, the DCDT was in the process of appointing a team of turnaround experts which would be based at the SAPO to ensure that the entity was reorganised and repositioned to remain relevant and eventually self-sufficient after the actual removal of the ownership of the SAPO from the SAPO group. The reorganisation and repositioning initiatives were expected to cut across all levels of governance and operations in order to ensure a remodelled entity that was optimal for service delivery, which included a review of the current turnaround plan.

There had always been firm acknowledgments from both the DCDT and the National Treasury that the SAPO would require financial support when the Postbank ownership was ultimately removed. The DCDT would facilitate the SAPO’s requests for financial injections through the medium-term expenditure framework (MTEF) processes to minimise the impact of the removal of the ownership of Postbank.

Conclusion

Upon the DCDT’s review of the public comments on the published Postbank Amendment Bill, it would be submitted to Parliament for the Committee to consider and undergo its own public consultation processes. The amendments to the Postbank Act were necessary to meet the section 43 requirements of the Banks Act, on the application for registration of the BCC that would exercise control over the Postbank. It would also enable incorporation of the Postbank BCC in terms of the Companies Act. The registration of the BCC with the SARB in terms of the section 43 application was the final step in the Postbank banking licence application. Once this step was completed, the Postbank would be viewed as fully compliant with all the banking licence application requirements as stipulated in the Banks Act, which would enable it to be awarded a fully-fledged banking licence.

Discussion

The Chairperson thanked the delegation for the briefing, and noted that the delegations from the Postbank and the SAPO had aligned themselves with the briefing made.

Mr C Mackenzie (DA) said that there was a sense of disquiet around the Postbank and its separation from the SAPO. The Minister of the DCDT had previously referred to the prospect of getting a low-interest loan from the Postbank, which was concerning, as the whole purpose of the corporatisation of the Postbank was to provide banking access to the unbanked people of South Africa. It was to enable the public to go to the Postbank for payday loans to ensure that the unbanked market had services at its disposal. It was concerning to hear that state-owned companies were intending to go to the Postbank for loans. It was concerning to hear the Postbank referred to as the state bank.

He asked for clarity on when the corporatisation process of the Postbank had started, and how much money had been spent on the process. The briefing made it clear that the Postbank and its assets were being removed from the SAPO group, and that the process was in its final stages. How would the Postbank’s separation from the SAPO impact on its ability to pay social grants as agreed upon, when it did not have a banking licence?

He asked for clarity on the staff implications of the separation between the two entities. It was trite that the SAPO was on the verge of bankruptcy, and clarity regarding the turnaround process was needed. He asked for an indication of the capital adequacy requirements that the SAPO would need in the BCC structure, and where the requisite capital would be coming from. Had National Treasury given the SAPO an indication of the funding it could obtain? He raised concern regarding how the SAPO would be able to continue to operate without the Postbank to anchor its balance sheet. How much capital would be required by the BCC structure, and where would the funding come from? He commented that the briefing was void of any timeframes for the processes to be completed, and asked that the Committee be provided with a detailed breakdown.

Mr Z Mbhele (DA) said that the Postbank’s utility and accessibility to the unbanked population would be severely diminished if the SAPO’s branches kept closing intermittently. There had been chronic issues with mismanaged and understaffed branches, or those that had issues with its systems. The institutional capacity and effectiveness of the operational management of the SAPO and the Postbank remained concerning.

Mr L Molala (ANC) said the briefing would help the Committee to get a clearer understanding of the Postbank’s separation from the SAPO. What impact did the separation have on the clients of the SAPO until it was finalised? Did it mean that the SAPO would now have to require the Postbank to pay rent in their buildings if they were going to use them, as a form of compensation so that the SAPO was not left collapsing? He also asked for clarity on whether the Postbank would now be another model of a state bank, or whether its operations would remain the same as previously.

Reponses from SAPO, Postbank and DCDT
Ms Jordan-Dyani responded that the SAPO’s agreement with the South African Social Security Agency (SASSA) was clear on what the responsibilities of the Postbank and the SAPO entailed. These arrangements would continue after the Postbank’s separation from the SAPO. The Postbank needed a banking licence to operate independently from the SAPO, but the SAPO’s financial position was hindering the process. The new Postbank, which was set to have a full banking licence, would be separate from the SAPO’s operations, but would still rely on its infrastructure. Postbank was also hoping to leverage its relationship with the Post Office and its social grant payment operations that administered payouts to 8.1 million beneficiaries.

To finalise its corporatisation and separation from the SAPO, the Postbank needed to obtain a banking licence to operate as a fully-fledged bank. However, for this to pass, one of the requirements of the SARB was for the Postbank to have a BCC, but the SAPO itself could not be registered as a BCC because of its poor financial standing. When the entities were separated, there would be governing instruments in terms of the status level agreements that would be in place for delivering the social grants.

Regarding the implications for staff members, she said there would be no implications in terms of the proposed amendments to the Postbank Act. When fully licensed and ready to go, the Postbank would be expected to comply fully with the requirements of the Banks Act.

Mr Moses Ntshabele, Director: SOC Overisght, said that the Postbank was currently operating under an exemption from the Banks Act, based on the conditions that were currently applicable to it. The Postbank was not allowed to provide any loans, and for it to be able to offer loans required a process that would unfold after the licensing process, as it would still have to apply to the SARB for any types of loans it wanted to offer. The Postbank would also have to register with the National Credit Regulator. The issue of the loan, as referred to by Mr Mackenzie, was not applicable.

Mr Mackenzie said there was an indication that some state-owned entities were looking at the Postbank as an option to obtain loans in the future. He asked the delegation to provide more clarity on this issue. He asked whether the Postbank would be the state-owned bank that the Minister of Finance, Mr Tito Mboweni, had been pushing for, alongside the ANC. The ANC’s congress resolution had been around the formation of a state bank, and various Ministers had agreed that this process was in part to meet that congress resolution. He commented that this filled him with a sense of disquiet to hear, and that it was concerning.

Mr Ntshabele continued, and said that the issue had not been decided yet, as it would depend on the conditions approved after the licensing application process had been completed.

Regarding the process of the corporatisation of the Postbank, he said that the issue of a state bank was an initiative that had been undertaken by the National Treasury, and assisted by the DCDT. The Postbank was already a state-owned institution under the SAPO, and the new Postbank would not replace the idea of a state-owned bank. A newly designed Postbank to service the poor and unbanked would not replace the much talked about state-owned bank. The DTPS was not referring to the Postbank as a state bank in the context of its product discussions, but it would be a licensed state-owned bank -- not necessarily a state bank in the context of the discussion taking place. The DTPS was finalising plans to introduce the Postbank as a full-service bank that would offer financial services such as loans to the poor and unbanked population – individuals and small business owners who were not catered for by established commercial banks.

Approaching the SARB for a banking licence paved the way for the Postbank’s entry into SA’s highly competitive banking industry. The Postbank, with its own finances, would be able to meet the requirements of the capital adequacy ratios, necessitating the setting aside of internal funding of R980 million. The interdependence of the SAPO and the Postbank had been concretised by the signing of the cooperation agreements between the two entities, which covered the shared services. The corporatisation process had started in 2004, evolving from the memorandum of understanding (MOU) that was signed between the Minister of Communications and the Minister of Finance at that time. This had emanated from the issue of protecting the depositors’ funds. The process had taken long to achieve.

Mr Molatlhegi Kgauwe, Interim Chief Executive Officer of the Postbank, said there would be no adverse implications for the staff of either the Postbank or the SAPO.

Ms Nomkhita Mona, Chief Executive Officer of the Postbank, said that processes were under way on how the Postbank would be able to support the SAPO in the future, after the separation of the two entities. This included the addition of international clients and upgrading the archaic manual systems of the entities.

Ms Tia van der Sandt, Acting Chairperson of SAPO’s Board of Directors, said that the SAPO and the Postbank still had an understanding that the two entities were joined at the hip. The Postbank’s transition task team was a structure for the board members of both entities to consider and address matters that arise from the separation of the Postbank from the SAPO. This included active engagements on how the two entities could work together in the future to ensure the effectiveness of both the SAPO and the Postbank.

Ms Mona added that in terms of the proposed amendments to the Postbank Act, it was planned to finalise the process by the end of the current financial year. There were quite a number of branches that had been reopened since the start of the COVID-19 pandemic. By 27 May 2021, a total of 27 branches which had been closed due to non-payment of rent, had been reopened. The rationalising of the number of branches had been under way because of the decision that was taken years ago to move SAPO’s branches closer to where the majority of foot traffic was, such as in shopping malls. There had been a proliferation of branches within a very short radius of one another, which had been seen as an opportunity to consolidate and merge branches. There would be branches that would be deliberately closing down, but the entities remained conscious of ensuring that rural areas still had access to a local branch. Where branches had had to be closed in rural areas, all efforts had been put towards ensuring that they could be reopened, but high crime levels played a role.

She confirmed that the DCDT and the DTPS were hoping to leverage on the Postbank’s wide footprint that allowed the SAPO to reach every corner of the country, and assist the unbanked to participate in the economy. In the long run, it would contribute to the economic growth of the country. The branches of the SAPO would be rationalised, and the leases for those branches that would be closed down would not be renewed.

Further Discussion

Mr Mackenzie referred to the facilities agreement between the Postbank and the SAPO, and asked whether the Committee could be furnished with the agreement. He restated his question on how much had been spent on the corporatisation of the Postbank. He asked for clarity on what capital adequacy was, in terms of the SARB’s requirements. Which entities were going to provide the capital for the BCC? How would the SAPO be funded when the Postbank was separated? He commented that the SAPO’s financial situation seemed to be beyond repair and that it was trading insolvently, which was a crime for which the directors could be held personally liable under the Companies Act. Since 2014, the SAPO had been losing money instead of making any. He said talk of turnaround strategies was not new, and even if the SAPO was compensated for its investment in the Postbank, it would not do much to ease the debt load of the SAPO. The SAPO had invested around R3.5bn in the Postbank, but all of this compensation would just go towards repaying its accumulating debt.

He appreciated the feedback regarding the closure of some of the SAPO’s branches and asked how many branches were still going to be closed, consolidated or merged in the near future. He also asked for clarity on what the estimated loss would be for the SAPO after its separation with the Postbank.

Reponses

Ms Jordan-Dyani committed to ensuring that the documentation requested by the Committee was sent through as a matter of urgency, and thanked Members for their inputs.

Ms Mona reported that about 80 of the SAPO branches would be closed nationwide, and this had been ongoing for a while. The targeted number of branches was 130. This was for a lot of reasons, including a lack of profitability and the fact that there were too many within a short distance of each other in terms of radius. Thus, a total of 88 branches would still be closed. The entities had to respect the current contracts they had with landlords because if they stepped out of them immediately, they were prone to penalties. Extensive negotiations had been entered into with the landlords in this regard.

Ms Van der Sandt responded to the questions on the solvency of the SAPO. The SAPO’s board of directors had taken the financial position seriously, despite the separation with the Postbank. It was important that the issues regarding the SAPO’s compensation from the Postbank be settled before any comments could be made.

Mr Moses reported that the Postbank was financially sound and had passed the capital adequacy requirements of the SARB. It had a net asset value of R3bn, and the SARB required banks to have enough capital set aside to withstand losses from soured loans or a "black swan event," such as the COVID-19 pandemic. This capital buffer was referred to as a capital adequacy ratio, which was expressed as a percentage. A bank’s failure could cause systemic risk to a country, as seen in the near collapse of African Bank in 2014. The SARB wanted banks to have enough capital available to survive economic shocks. The Postbank had a capital adequacy ratio of 30%, which satisfied the requirements of the SARB.

He said the BCC did not conduct any business other than supervision and control, and would therefore be the sole shareholder with the same financials and shared capital as the bank. There would not be any requirement that the BCC must have additional capital. However, going forward, it would then be an issue of when the bank started to issue loans and started expanding its operations.

Ms Jordan-Dyani noted that the outstanding questions regarding the costs of the corporatisation of the Postbank would be responded to in writing to ensure that the proper figures were passed along to Members. She added that the facilities agreement between the SAPO and the Postbank was a commercial agreement.

Mr Mbhele asked whether the separation of the Postbank from the SAPO would not diminish the SAPO’s service delivery because of the closures of its branches, either through chronic issues such as mismanaged and understaffed branches, or those that had issues with its systems.

The Chairperson asked that the delegation clarify the issue of the shareholding of the DCDT and the Minister of the DCDT, so that the Committee could thoroughly understand the issue.

Ms Jordan-Dyani repeated that the intention behind the separation of the Postbank from the SAPO was to provide services to the unbanked market and South African citizens. This was subject to statutory requirements that needed to be fulfilled before the Postbank could be separated from the SAPO in terms of the legislative framework that was outlined to the Committee at the start of the briefing.

Mr Mackenzie said that he was not satisfied with the responses given. The SAPO had incurred a loss of R1.8 bn for the financial year that ended in March 2002, and the Auditor-General of South Africa (AGSA) had given the entity an adverse audit opinion. It was the third consecutive financial year that the entity was insolvent. It seemed as if the only light on the horizon was the possibility that the SAPO would get a couple of billion rands from the Postbank.

Ms Jordan-Dyani responded that the outstanding questions would be fully replied to in writing.

The Chairperson thanked the delegations for the briefing and the information provided to the Committee, and thanked Members for their inputs during the meeting.

The meeting was adjourned.