Grim peek into Abil kitchen

The autopsy of African Bank shows that investors who believe boards are ensuring all the i’s are dotted are fooling themselves

Turns out it’s not just sausages and legislation that you should never watch being made. The Myburgh report into the demise of African Bank (Abil) shows that you can now add deliberations by boards of JSElisted companies to that list. Myburgh’s key findings are well-known: CEO Leon Kirkinis displayed “hubris” and resisted calls by auditors Deloitte to hike the bank’s impairments to cover bad debt, even though it was on a high-risk path of chasing loans.

But dig a little deeper and the wrangling behind the scenes during Abil’s last months begins to look truly terrifying.

While few emerge with their reputations enhanced from this peek into the kitchen, two people did stand up to Kirkinis.

One was Samuel Sithole, an independent director of Abil and a former financial director of private equity company Brait.

Sithole had chaired Abil’s audit committee since 2011, but had become increasingly uncomfortable. At a board meeting in April 2013, Kirkinis revealed a 26% fall in loans, for which extra provisions were needed. Sithole wasn’t happy, arguing that Deloitte should be asked to review whether the provisions set aside to cover bad debt were appropriate before releasing a trading statement. Kirkinis vetoed this request.

Over the next few weeks, Sithole warned him not to strike an “overly optimistic tone” with investors. The business isn’t in the great shape you think it is, he said. Again, nobody listened.

Ignored and frustrated, Sithole resigned on June 30, sending a blistering letter to Kirkinis.

“By denying, or not being aware of the true condition of the business, management postponed urgent corrective steps that could have been taken to address the situation . . . an opportunity was missed to disclose (this) to shareholders,” he said. Instead, Sithole said Kirkinis had struck an “overly positive tone” when the reality was that things were falling apart.

For example, Abil’s push to reach R75bn in loans meant it was extending bigger loans for longer, notching up the risk.

At the same time, nonperforming loans had ballooned fourfold to R17bn on a total book of R59bn.

Kirkinis wrote back, patronising him: “In times like we are facing, it is imperative that as directors and leaders we remain calm, level headed and cognisant of our responsibilities.”

Well, as it turned out, Sithole was on the money — even if shareholders weren’t told.

Only three months later did Abil tell investors that Sithole had quit — but they claimed it was because of a “potential conflict of interest that may arise between the businesses carried on within Abil and Brait”.

One other person to come out of this debacle well is Gustav Raubenheimer, Kirkinis’s former head of credit who is the financial director of the “New African Bank” under CEO Brian Riley.

Internal documents show that Raubenheimer had urged Kirkinis for months to increase the impairments. Again, Kirkinis didn’t think it was necessary.

Frustrated, Raubenheimer wrote to Kirkinis in February 2014 with a devastating critique of the business. He said “three people make all the decisions”, the bank’s executive committees are “ineffective”, while the board of directors “is useless”.

Raubenheimer listed the board’s deficiencies thus: “They have no balls; don’t understand retail credit at all; no skills in retail; no skills in marketing; no banking skills; ask the same questions meeting after meeting”. He also warned that “there is an attitude that accounting can be manipulated”.

Kirkinis was clearly in no mood to heed these warning bells. And, a few months later, African Bank tipped into curatorship, its credibility shot.

As it turned out, Myburgh agreed with Raubenheimer. The board hadn’t done their job.

Here, Myburgh’s report has underscored the fact that you can have a board that appears to tick all the boxes, but if the right questions aren’t being asked behind closed doors, they might as well be statues.