7
Jul
2020

Remorseless

While every short seller is still celebrating the demise of Wirecard, I thought it might be worth writing about another financial institution that is in the 95% club – the share price has fallen 95% since the start of 2014. Incorporated under the laws of the British Virgin Islands, the bank I’m thinking of has grown by making an alphabet soup of acquisitions (ADC and BancABC in March 2014, BRD Commercial and UBN later in the same year).
What is more, the 95% decline is flattered by capital raisings along the way. Dilution from increasing shares outstanding from 72m in 2014 to 175m in 2020.

  • Dec 2013 $325m raised
  • Aug 2014 $300m private placement
  • June 2017 $200m raised

This institution, founded by a former UK bank Chief Executive is categorically not a fraud. It’s just been a very poor investment, and shows that even (previously) well regarded management and good corporate governance can suffer large losses. I’m neither long nor short of this bank at the moment, and if you forced me off the fence, I’d buy rather than short the shares.
Can you guess what it is yet? Click on the thumbnail below to enlarge the share price chart:

 

Davos man thinking

The founder’s vision was to be a “positive disruptive force” and “create meaningful value for our stakeholders” was enough to put me off from the start. Looking back at the 2014 Annual Report, the first 17 pages are full of what I call “Davos man thinking”. My ex girlfriend worked at Davos as a waitress, and she confirmed to me that many of the people at Davos really are as insufferable as they seem.
The investment case is supported by Demographics (population trebled in the region from 1980 to 2013), Natural Resources, Technology (leap frogging), FDI, Urbanisation (the rise of cities), Expanding Middle Class. With such a diverse set of trends, I’m surprised that they didn’t include Global Warming and invite Greta Thunberg to be a Non Executive Director.
It just sounded too much like PR waffle, not really defining an existing problem and describing what this new bank was going to do differently.

£75m for being indispensable 

Inevitably the management commentary made numerous references to attracting and retaining “the best management talent in the industry and establish effective corporate governance frameworks, which can serve as a model in the region.”
The founder has a notable track record in this regard. While he was in a senior position at his former UK bank, he benefited from a subsidiary’s very generous Employee Option Scheme which was designed to recruit and retain talent. Directors of the main group were not eligible for this very generous scheme, but that was fine because he did not join the Board until 2005 and did not become Chief Executive of the group until after the financial crisis. This allowed him to pocket over £20m in 2008-9, during the depths of the financial crisis as the subsidiary was sold and he cashed in his options. This individual earned around £75m between 2005-2011 shortly before he was forced by the UK regulator to step down and leave the bank, according to this article.  (Don’t click on the link if you want to try and guess the bank I’m talking about). 

That £75m understates his career earnings though, because he was likely paid a similar amount before he joined the main board, but those rewards didn’t need to be disclosed to shareholders.  He was certainly seen as “indispensable” in 1998 by the then Chief Executive who later changed his mind, and described that indispensability as a “myth”, in this article

Banking decline

Back to the bank he founded in 2013. Given it was a “start up”, $48m of proforma losses in 2014 are perhaps understandable. But by 2019 losses had ballooned to $143m with a further $104m of write downs in Q1 2020 – that is to March 2020, before the impact of COVID-19 has really been felt. Despite the big picture growth scenario outlined above, net interest income declined 35% in 2019 as the loan book shrunk. Cruel.
Banking, particularly in emerging and frontier markets, tends to be local country specific. You make high returns by having high market share, hence economies of scale locally, there are few international synergies. It makes little sense to have a network of banks with lower market shares spread across different countries. Management have belatedly recognised this, and after a strategic review are trying to exit from 4 countries: Mozambique, Rwanda, Tanzania and Zambia. This is taking longer than they anticipated though.  To offset this disappointment, investors will also be pleased to read that in 2019, the bank regained market share in Zimbabwe.

Talent v luck

To be fair, the bank has been unlucky. The acquisitions were in some economies dependent on oil exports, just before the oil price collapsed in 2015-16, and those countries faced currency devaluation and a severe recession. Every bank has of course suffered with the recent COVID-19 disease effect on economies. But still, an unrelenting 95% decline in the share price in 6 years, that seems like more than just unlucky, that takes…erm… talent!

Losing money

I should also point out that the IPO prospectus shows the Founder did back his judgement with $16m of his own money:

  • 600,000 of ordinary shares, at $10 per share – worth at the time $6m
  • 1.6m of warrants
  • 1m of preferred founder shares (which would reward him with new ordinary shares each year if the quoted price rose 20%, otherwise convert on a one for one basis into ordinary shares after 7 years) – worth at the time $10m

At the end of last year, the Founder owned 3.8m shares, and as a Non Executive Director did not take a salary. The Founder Preferred Shares seem likely to convert at a much lower price than he would have expected in 2014, and 1.6m of warrants exercisable at $11.50 are likely to be worthless if my reading of prospectus is correct, so he has shared in the pain of the falling share price.

Audit matters

There are several audit matters mentioned in the 2019 report:

  • uncertainty regarding the calculation of Expected Credit Losses,
  • slow progress with disposing of subsidiaries in Mozambique, Rwanda, Tanzania and Zambia was originally announced in April 2019, but still hasn’t happened.  
  • the uncertainty on how much goodwill is shown on the balance sheet

But these are standard.  No one thinks auditors have much idea about how to calculate credit losses, and many investors tend to write off goodwill on banks’ balance sheets anyway. As I say, this investment is categorically not a fraud. This is a bank that has reported disappointing results, not made up the numbers.

Discount to book value

The stockmarket takes a more pessimistic view than book value reported in the 2019 Annual Report. Past year’s disappointments and likely further disappointments mean that the share price is trading at around a quarter of book value. The Chairman’s remarks in the 2019 Annual Report draw attention to this. This remorseless example goes to show that you don’t need fraud to lose a lot of money in banking or trade at a 75% discount to accounting book value. Instead you can lose almost all your money when you back management who believe their own hype and make poor strategic choices.

Have you guessed the name of the bank?

It is Atlas Mara, the sub Saharan African bank founded by Bob Diamond after he resigned from Barclays.

The time for remorse is over.

Photo by Chris Lawton on Unsplash

Please note: I don’t have a position in this bank, but may do in future.  I’m not a short seller.  If I had to be a buyer or a seller, I’d probably buy now the shares have fallen 95%.